<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended June 30, 1997
Commission File No 0-19971
UNIVERSAL SEISMIC ASSOCIATES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 76-0256086
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
16420 PARK TEN PLACE, SUITE 300, HOUSTON, TEXAS 77084-5051
(Address of Principal Executive Offices Including Zip Code)
(281) 578-8081
(Issuer's Telephone Number Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $32,795,147
As of October 10, 1997, there were outstanding 5,234,109 shares of the
registrant's common stock, par value $.0001, which is the only class of common
or voting stock of the registrant. As of that date, the aggregate market value
of the shares of common stock or voting stock held by non-affiliates of the
registrant (based on the closing price for the common stock on the NASDAQ
National Market System on October 10, 1997) was approximately $9,181,160.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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UNIVERSAL SEISMIC ASSOCIATES, INC.
ANNUAL REPORT ON FORM 10-KSB/A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS ......................................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY ......................................................................... 6
ITEM 3. LEGAL PROCEEDINGS ............................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............................................. 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................................ 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................................................... 13
ITEM 7. FINANCIAL STATEMENTS............................................................................. 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE ...................................................................................... 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ............................................... 16
ITEM 10. EXECUTIVE COMPENSATION........................................................................... 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .................................. 19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................................................. 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ................................................................ 25
</TABLE>
<PAGE> 3
PART I
The Company's Annual Report on Form 10-KSB as filed with the Securities
and Exchange Commission for fiscal year ended June 30, 1997 is hereby amended by
this Form 10-KSB/A to reflect the audit and restatement of the Company's fiscal
1997 and 1996 financial statements. Except as otherwise indicated herein,
statements as to current and present conditions are as of October 20, 1997, the
date of the filing of the Company's Annual Report on Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
Universal Seismic Associates, Inc. (hereinafter referred to together
with its subsidiaries as the "Company") was incorporated in Delaware in July
1988. Prior to May 1994, the Company was exclusively a seismic data acquisition
company providing services through its subsidiary, Universal Seismic
Acquisition, Inc. ("Acquisition"). In May 1994, the Company acquired a data
processing services company and renamed it Universal Seismic Technologies, Inc.
("UST"). In January 1996 the Company formed a wholly owned subsidiary, UNEXCO,
Inc. ("UNEXCO"), to conduct oil and gas exploration and production activities.
See "Significant Developments Since June 30, 1996" regarding the restatement and
reclassification of Consolidated Financial Statements.
The Company is a provider of three-dimensional ("3-D") seismic
acquisition and processing services to the energy industry in the United States
("U.S.") and also participates in carefully selected oil and gas projects
through UNEXCO. Oil and gas companies utilize seismic data in determining
suitable locations for drilling wells, in the development of oil and gas
reserves and, increasingly, in reservoir management. The Company acquires, on a
contract basis, seismic data for energy and energy service companies, which
typically have exclusive ownership of the data. The Company also processes
seismic data for both acquisition clients and energy customers that have
acquired data from other sources.
In September 1991, the Company obtained its first data acquisition
system with 3-D capability. The system, an Input/Output, Inc. ("I/O") SYSTEM TWO
("SYSTEM TWO") employs a 24 bit analog-to-digital converter using advanced delta
sigma technology. The Company presently has the equipment capability of
operating up to five such I/O systems.
The Company uses state-of-the-art seismic recording systems and
experienced crews, both of which are necessary in order to provide 3-D seismic
services to the oil and gas community. The Company has further enhanced its
traditional acquisition business by offering 3-D seismic data processing and
analysis. The Company began operating in swamp and shallow water environments in
conjunction with the addition of its I/O SYSTEM TWO Remote Seismic Recorder
crews in October 1995 and June 1996.
DATA ACQUISITION
Seismic Crews. A seismic crew typically consists of a supervisor, crew
chief, assistant crew chief, an observer who operates the seismograph and
controls the recording of seismic data, and general laborers who place and move
the geophones and related equipment. A seismic crew typically uses general
laborers who are part of either (i) a drill crew that drills holes for
explosives and shooters who detonate the explosives or (ii) a vibroseis crew
that operates the vibroseis trucks. A fully staffed seismic crew typically
consists of 35 to 55 people. The Company has the ability to staff its
acquisition crews according to specific client requirements. The Company
operated three crews during most of the quarter ended September 30, 1997, and if
all of its equipment were placed in operation the Company would have to hire and
train additional personnel. The market for experienced personnel is presently
very tight.
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Contracts. The Company's Data Acquisition activities are conducted
under contracts with customers who typically retain exclusive ownership of the
acquired seismic data. Contracts, which are awarded on a competitive bid basis,
are either "turnkey" contracts which provide for a fixed fee to be paid to the
Company for each unit of data acquired or "term" contracts which provide for a
fixed monthly fee and bonuses for production during the term of a project.
Turnkey contracts generally can provide more profit potential for the Company,
but involve more risk because of potential down time for weather and other types
of delays.
DATA PROCESSING
The Company's Data Processing center located in Houston, Texas is a
high technology provider of seismic data processing and analysis. Data
Processing combines raw data collected in the field and enhances it through
various processes into a form ready for interpretation by customers in the oil
and gas industry. The Company has added externally developed software and
hardware operating on a Unix based platform to enhance its 3-D processing
capabilities. The center utilizes its internally developed, PC-based,
interactive workstations for smaller 3-D projects and two-dimensional ("2-D")
processing.
The Company also reprocesses older existing data using current
techniques in order to enhance the usefulness of that data.
OIL AND GAS
The Company participates in oil and gas exploration projects through
its wholly owned subsidiary, UNEXCO. The Company earns or purchases carried and
working interests in carefully selected 3-D seismic projects with the goal of
creating substantial oil and gas reserves and a revenue stream from these
interests.
The Company typically earns a working interest in a prospect by
acquiring the 3-D seismic data using its own acquisition and processing
resources. Partners in the prospect typically contribute the oil and gas leases
and/or options, geological and engineering expertise and operating capability.
UNEXCO maintains a state-of-the-art interpretation workstation, and together
with the Company's partners, jointly interprets the 3-D seismic data. After
interpreting the 3-D data and integrating the geological and engineering data,
the Company and its partners will decide whether to drill the prospect
themselves or try to sell their interests for cash or a carried interest to oil
and gas industry participants.
As of September 30, 1997, the Company had participated in ten completed
3-D seismic programs (nine in fiscal year 1997) totaling approximately two
hundred twenty square miles of 3-D program. The Company earned an interest in
one additional project by reprocessing an existing 3-D data set and is currently
permitting an additional program. For additional information on oil and gas
activities, see "Oil and Gas" under Item 2.
SEASONALITY
The Company has the opportunity to generate its highest Data
Acquisition revenues during the summer months, primarily because this period
typically provides for more recording hours due to longer days. Although certain
seasons during the year generally provide better working conditions, adverse
weather conditions may impact Data Acquisition revenue at any time throughout
the year.
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CUSTOMERS
The Company's Data Acquisition customers include major and independent
oil and gas exploration companies and service companies. The following table
sets forth the Company's Data Acquisition customers who accounted for 10% or
more of the Company's revenues in either of the past two fiscal years:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Customer A 29% 0%
B 13% 4%
</TABLE>
The Company's mix of customers changes yearly as contracts are awarded
and completed. The Company is unable to anticipate whether significant portions
of its future revenues may be attributable to a few customers, although it is
likely the customer mix will change from year to year.
COMPETITION
The acquisition and processing of seismic data for the oil and gas
exploration industry is highly competitive. Although reliable comparative
figures are not available, the Company believes, and it should be assumed, that
some of its principal competitors have more extensive and diversified operations
and some also have financial, operating and other resources substantially in
excess of those available to the Company.
The Company's competitors for seismic Data Acquisition and Data
Processing contracts include Western Atlas, Veritas DGC, Inc., the GECO division
of Schlumberger, Inc., Grant Geophysical, Boone Geophysical, Inc., Tidelands
Geophysical Co., Inc. and several other companies. Competitive factors that
affect the decision on who is awarded a 3-D Data Acquisition contract include
past performance, dependability, reputation, price and availability of
equipment. For Data Processing, industry reputation, turnaround time and price
are the critical factors in receiving a job.
UNEXCO operates in the highly competitive areas of oil and gas
exploration, development and production. The Company's competitors include major
integrated oil and gas companies and substantial independent energy companies,
many of which possess greater financial and other resources than the Company.
BACKLOG
On June 30, 1997, the Company had a backlog of Data Acquisition
contracts of approximately $15.0 million. In most cases, the agreements may be
terminated by the customer upon 30 days written notice without substantial
penalty. For this and other reasons, the Company's backlog at any particular
date may not be indicative of the Company's revenues or other operating results
for any succeeding fiscal period. The Company cannot, therefore, assure that the
backlog will be realized as revenue. As of June 30, 1997, the Company's Data
Processing center had contracted backlog of approximately $182,000. These
contracts are generally terminable by the customer at any time prior to the
actual work being done and, therefore, may not be indicative of future revenues
or operating results.
On September 30, 1997, the Company had a Data Acquisition backlog of
$4.8 million and a Data Processing Backlog of $116,000.
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SUPPLIERS
The Company's primary supplier of seismic data acquisition equipment is
I/O. This equipment and related replacement parts are readily available from I/O
and other industry suppliers and can be obtained under leasing or purchasing
arrangements. Management believes that its relationship with I/O and other
various equipment suppliers is satisfactory.
EMPLOYEES
On June 30, 1997, the Company employed 244 people, all of whom are full
time employees, and none of whom is covered by a collective bargaining
agreement. The Company considers its employee relations to be satisfactory.
SIGNIFICANT DEVELOPMENTS SINCE JUNE 30, 1996
Business Expansion. In fiscal 1997 the Company continued the expansion
of its operations. Data Acquisition activity increased due to a full year of
operation from the two most recently added 3-D acquisition crews. The Company
began operating in swamp and shallow water environments in conjunction with the
addition of these crews in October 1995 and June 1996. This represented the
Company's first significant Data Acquisition effort in these environments. The
Company's Data Acquisition crews experienced reduced gross margins that, when
combined with indirect overhead, depreciation and interest expenses, led to
fiscal 1997 operational losses. The reduced gross margins also resulted from
less than full utilization of the Company's crews and operational difficulties
incurred on several significant projects. The Company's oil and gas exploration
and production operation recognized its first revenues in the 1997 fiscal year
and reported proved reserves with an after tax SEC PV10 value of $7,294,000.
Aborted Merger, Proxy Fight, and Shareholder Suit. During fiscal 1997
the Company was involved in an aborted merger that led to a proxy fight with a
group of shareholders. This same group of shareholders filed a suit against the
Company and its directors in United States District Court in Delaware. The proxy
fight was resolved at the annual shareholders meeting held in February 1997 at
which management's slate of directors was reelected and all proposals in
opposition to management were defeated. The shareholder suit was settled and
received final court approval on October 1, 1997. For additional information,
see Item 3 "Legal Proceedings". The Company incurred significant costs related
to the aborted merger, proxy fight and shareholder suit. These costs
significantly impacted fiscal 1997 operating losses.
Financing Activities and Debt Covenants. On December 20, 1996, the
Company entered into a financing agreement with RIMCO Partners, L.P., RIMCO
Partners II, L.P., RIMCO Partners III, L.P. and RIMCO Partners IV, L.P.
(collectively, "RIMCO") to provide $4,000,000 (increased to $5,500,000 on March
27, 1997) under a revolving credit facility for the expansion of the Company's
exploration and production activities. On March 27, 1997, the Company borrowed
an additional $2,000,000 from RIMCO for general working capital purposes. In
August 1997 the Company borrowed an additional $2,000,000 from RIMCO with
proceeds being utilized to fund the shareholder litigation settlement and legal
and accounting fees incurred as a result of such litigation. The liability for
borrowing from RIMCO was $18,684,346, including accrued interest as of September
30, 1997.
RIMCO has waived the covenants, including principal and interest
payment covenants, under the various financing agreements until July 1, 1998. As
of June 30, 1997, the Company was also in default under certain provisions of
its financing agreement for its trade receivables and was unsuccessful in
obtaining a waiver. The Company still received advances under the agreement
until November 30, 1997, at which time at the Company's request, the agreement
was terminated.
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Unusual Charge. The Company leases a 720 channel OPSEIS 5586 telemetry
acquisition system under an operating lease through March 2000. Due to the
recording limitations of this system, the Company believes it has become
non-competitive in the 3-D data acquisition market. The system has not operated
since October 1996 and the Company recognized the remaining $929,191 of monthly
lease payments in the fourth quarter of fiscal 1997.
Additional Recent Developments. In August 1997, the Company's Board of
Directors engaged Morgan Keegan & Company, Inc. ("Morgan Keegan") to assist in
exploring, developing and recommending various strategic alternatives designed
to enhance shareholder value. This activity did not produce any results deemed
acceptable by the Board of Directors.
Resignation of Independent Accountants and Restatement of Previously
Issued Financial Statements. In February 1998, the Company's independent
accountants (Coopers & Lybrand L.L.P.) who had issued opinions on the financial
statements for the years ended June 30, 1997 and 1996 resigned and stated that
its opinions with respect to the financial statements for those years should no
longer be relied upon. In March 1998, the Company engaged Arthur Andersen LLP as
its independent public accountants to perform the necessary audits and to issue
new auditors' reports on the financial statements for fiscal 1997 and 1996.
As a result of a comprehensive review begun by the Company in December
1997, and the audits performed by new independent public accountants, it was
determined that certain adjustments and reclassifications were necessary to
fairly state the financial statements for the years ended June 30, 1997 and
1996. These adjustments principally relate to the timing for recognition of
contract revenue and associated costs under percentage of completion accounting
and to certain costs which were expensed as cost of data acquisition but should
have been recorded as capitalized oil and gas properties. In addition, it was
determined that the gain on the sale of an oil and gas property previously
reported of $559,461 in fiscal 1997 should not have been recognized in income
but instead recorded as a reduction of oil and gas properties in accordance with
full cost accounting. The following is a summary of the adjustments and the
related impact on the statement of operations for each year previously reported:
<TABLE>
<CAPTION>
RESTATEMENTS FOR THE
YEAR ENDED
JUNE 30,
------------------------------
Increase (decrease) of amounts previously reported
1997 1996
------------ ------------
<S> <C> <C>
Data acquisition revenues $ 1,428,718 $ (1,721,650)
Data processing and reproduction revenues 79,100 (79,100)
Cost of data acquisition (373,149) 1,074,658
Gain on sale of oil and gas property (559,461) --
Interest expense 72,168 50,515
------------ ------------
Net adjustments 647,376 (675,577)
Net loss previously reported (6,171,539) (808,857)
------------ ------------
Restated net loss for periods $ (5,524,163) $ (1,484,434)
============ ============
</TABLE>
The net financial impact of these adjustments increases the loss
previously reported in fiscal 1996 by $675,577 to $1,484,434 and reduces the
loss previously reported in fiscal 1997 by $647,376 to $5,524,163, resulting in
a net charge to equity of $28,201 for the combined two-year period.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases corporate office facilities in Houston, Texas,
consisting of approximately 19,779 square feet, under a 120 month lease expiring
on June 14, 2005, subject to the Company's option to cancel on, but not before
or after, the 60th month, or the 84th month, with monthly rental of $18,011. The
Company, from time to time, also leases temporary offices for its field crews,
the terms of such leases being dependent on the size and term of the project.
All real property leased by the Company is in good condition.
DATA ACQUISITION
The Company has the equipment capability of operating up to five 3-D
Data Acquisition crews utilizing I/O SYSTEM TWO equipment. The Company's
approximately 8,100 channels of I/O data recording equipment are interchangeable
among its crews, allowing for the combination of crews when necessary. This
provides the Company with flexibility in designing recording programs to meet
the specific requirements of each project. Up to three I/O Systems can be
operated using cable technology to link remote signal conditioners to the
central electronics unit or control center. Up to two I/O RSR crews can be
operated using radio telemetry technology to link the system. This telemetry
technology allows the Company to operate in environmentally sensitive areas such
as swamp/marsh areas along the Gulf Coast and in other challenging geographic
areas. The crews typically operate along the Gulf Coast, from Texas to Florida,
and have the ability to use dynamite, airgun and vibroseis energy sources.
In addition, the Company has a 720 channel OPSEIS 5586 telemetry
acquisition system under an operating lease. This system was in operation for
approximately four months during the fiscal year ended June 30, 1997. Due to the
recording limitations of this system, the Company believes it has become
non-competitive in the 3-D data acquisition market. The Company, therefore,
expensed the remaining portion of the related operating lease in fiscal 1997 and
does not anticipate significant operation of this system in the future.
DATA PROCESSING
The Company operates a Silicon Graphics Power Challenge system as its
primary hardware source. This system delivers up to 5.4 gygaflops (transfer rate
of one million floating point numbers per second) of maximum performance and has
a 64-bit architecture which enables its servers to support the large memory and
file size requirements of supercomputing environments. The Company primarily
utilizes Seis Up software under a license with Geocenter, Inc. Seis Up is a
fully interactive, standards compliant, seismic processing system designed
specifically for processing large volume land and marine 2-D and 3-D seismic
surveys. Seis Up also offers optimized 3-D parallel processing on networks or
clusters of segregated workstations.
OIL AND GAS
The following terms have the meaning indicated when used in this
report.
Bbl. - a standard barrel of 42 U.S. gallons
Gross - acre or well in which a working interest is owned
Mbbl - one thousand barrels
Mcf - thousand cubic feet of gas
MMbtu - one million british thermal units
MMcf - one million cubic feet of gas
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MMcfe - one million cubic feet equivalent with one barrel
of oil or condensate converted to six thousand cubic
feet of gas based on the estimated relative energy
content
Net - acres or wells obtained by multiplying the gross
acres or wells by the Company's working interest
Proved
Reserves - those estimated quantities of crude oil, condensate
and natural gas that geological and engineering data
demonstrate with reasonable certainty to be
recoverable in future years from known oil and gas
reservoirs under existing economic and operating
conditions
PROVED RESERVES
The Company holds interests in oil and gas properties, all of which are
located in Texas and Louisiana.
The following table summarizes the Company's proved reserves as of July
1, 1997, as reflected by the report of the independent oil and gas engineering
firm of Netherland, Sewell & Associates, Inc. The present value of the estimated
future cash flows are before income tax, with constant prices and costs and
discounted at 10 percent (SEC PV10 Value). The Company did not have any proved
reserves prior to this year.
<TABLE>
<CAPTION>
Oil and Natural Natural Gas
Condensate Gas Equivalents SEC PV10
(Mbbl) (MMcf) (MMcfe) Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Developed 15 797 887 $1,267,000
Undeveloped 169 8,761 9,775 6,735,300
---------- ---------- ---------- ----------
184 9,558 10,662 $8,002,300
========== ========== ========== ==========
</TABLE>
In general, estimates of economically recoverable oil and natural gas
reserves or the future net cash flows therefrom are based upon a number of
variable factors and assumptions, such as historical production from the
properties, assumptions concerning future oil and natural gas prices and future
operating costs and the assumed effects of regulation by governmental agencies,
all of which may vary considerably from actual results. Estimates of the
economically recoverable oil and natural gas reserves attributable to any
particular group of properties based on risk of recovery and estimates of future
net cash flows expected therefrom prepared by different engineers or by the same
engineers at different times, may vary substantially. The Company's actual
production, revenues, severance and excise taxes and development and operating
expenditures with respect to its reserves will vary from such estimates, and
such variances could be material.
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
In accordance with applicable requirements of the Securities and
Exchange Commission ("SEC"), the estimated discounted future net cash flows from
estimated proved reserves are based on prices and costs as of the date of the
estimate unless such prices or costs are contractually determined at such date.
The
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Company used $17.75 per Bbl of oil and condensate and $2.25 per MMbtu for
natural gas, representing the posted price for West Texas Intermediate at June
30, 1997, and the average Vinton spot price for June, respectively. Actual
future prices and costs may be materially higher or lower. The June 1997 prices
realized averaged $17.48 per Bbl for oil and condensate and $2.15 per Mcf for
gas. Actual future net cash flows also will be affected by factors such as
actual production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact or inflation on costs.
Since July 1, 1997, no oil or gas reserve information has been filed
with, or included in any report to, any U.S. authority or agency other than the
SEC and the Energy Information Administration ("EIA"). The basis of reporting
reserves to the EIA for the Company's reserves is identical to that set forth in
the foregoing table.
PRODUCTION AND PRICING
The Company recognized its first revenues from its oil and gas
operations in fiscal 1997. Since this was the first production it may not be
indicative of future costs or prices. Production, average sales prices and
production costs for fiscal 1997 are as follows:
<TABLE>
<S> <C>
Production
Oil and condensate (Bbls) 418
Natural gas (Mcf) 48,331
Natural gas equivalents (Mcfe) 50,839
Average sales price
Oil and condensate, per Bbl $ 20.38
Natural gas, per Mcf $ 2.17
Production costs, including production tax,
Per Mcfe $ 0.47
</TABLE>
PRODUCTIVE WELLS
The number of productive wells in which the Company had an interest at
June 30, 1997 is set forth below. All of the wells are operated by others.
<TABLE>
<CAPTION>
Gross Net
----- -----
<S> <C> <C>
Oil 1 .1
Gas 10 2.9
----- -----
11 3.0
===== =====
</TABLE>
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Acreage
The table below sets forth the acreage in which the Company had an
interest at June 30, 1997. As of June 30, 1996 the Company held 2,480 gross
undeveloped acres and 289 net undeveloped acres. Developed acreage includes that
assigned to the existing productive wells reflected above. Undeveloped acreage
is considered to be those leased acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil or gas regardless of whether or not such acreage contains proved
reserves. The Company's acreage is entirely in Texas and Louisiana.
<TABLE>
<CAPTION>
Acreage
------------------------
Gross Net
------- -------
<S> <C> <C>
Developed 6,305 2,352
Undeveloped 24,471 8,085
------- -------
30,776 10,437
======= =======
</TABLE>
DRILLING ACTIVITY
A summary of the wells in which the Company participated that were
completed in fiscal 1997 is set forth below. A productive well is a well which
was producing or which was capable of commercial production at June 30, 1997.
<TABLE>
<CAPTION>
Gross Net
------- -------
<S> <C> <C>
Exploratory
Productive 9 2.1
Dry 3 1.0
Under evaluation 2 .6
------- -------
14 3.7
======= =======
Development
Productive 2 .9
Under evaluation 1 .1
------- -------
3 1.0
------- -------
17 4.7
======= =======
</TABLE>
CAPITAL REQUIREMENTS
The Company will require substantial capital expenditures for the
exploration, exploitation and development of its existing properties and any new
ones the Company acquires. The Company's current level of indebtedness limits
its ability to fully recognize the potential of its existing properties and to
expand its oil and gas operations. While oil and gas reserves are expected to
increase in fiscal 1998, cash flow from operations will not be sufficient to
fund required capital expenditures. There can be no assurance that additional
debt or equity financing will be available.
SHORTAGES OF RIGS, EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling rigs, equipment and supplies
which the Company believes may intensify. The costs and delivery times of rigs,
equipment and supplies are substantially greater than in prior periods and are
currently escalating. Shortages of drilling rigs, equipment or supplies could
delay and adversely affect the Company's exploration and development operations.
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The demand for, and wage rates of, qualified rig crews have begun to
rise in the drilling industry in response to the increasing number of active
rigs in service. Such shortages have in the past occurred in the industry in
times of increasing demand for drilling services. If the number of active rigs
continues to increase, the oil and gas industry may experience shortages of
qualified personnel to operate drilling rigs, which could delay the Company's
planned drilling operations.
REGULATION OF OIL AND NATURAL GAS EXPLORATION AND PRODUCTION
Exploration and production operations of the Company are subject to
various types of regulation at the federal, state and local levels. Such
regulation includes requiring permits for the drilling of wells, maintaining
bonding requirements in order to drill or operate wells, and regulating the
location of wells, the method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled and the plugging and
abandonment of wells. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled and unitization or pooling of oil and gas properties. In this regard,
some states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands and leases. In
addition, some state laws establish maximum rates of production and some prorate
production to market demand.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local laws
and regulation governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities on certain lands lying within wilderness, wetlands
and other protected areas, and impose substantial liabilities for pollution
resulting from the Company's operations. In addition, these laws, rules and
regulations may restrict the rate of oil and natural gas production below the
rate that would otherwise exist.
RECENT ACTIVITIES
In the three months ended September 30, 1997 the Company participated
in the drilling of 7 (3.3 net) wells of which 3 (1.3 net) were productive, 3
(1.0 net) were dry and 1 (.1 net) was still being drilled.
In August 1997 the Company sold 45% of its interest in the Lake Boeuf
prospect for $1,012,500 and a carried interest to casing point in the first 3
wells in that prospect. This sale reduced the Company's proved undeveloped
reserves by approximately 2,981 MMcfe and the SEC PV10 value by approximately
$1,981,000.
Substantially all of the Company's assets, including all its oil and
gas properties, are pledged under terms of various financing arrangements. See
Note 6 to the consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are defendants or
parties in lawsuits or other proceedings arising in the ordinary course of the
Company's business. Such lawsuits typically relate to claims arising from the
Company's seismic activities. The Company is not aware of any such proceedings
which it deems to be potentially material.
10
<PAGE> 13
The Company was involved in an aborted merger in early fiscal 1997 that
led to a proxy fight with a group of shareholders that styled themselves "The
Universal Seismic Stockholders' Protective Committee" (the "Stockholders'
Committee"). The proxy fight was resolved at the reconvened Annual Meeting of
Shareholders on February 11, 1997, at which management's slate of directors was
reelected and all of the Stockholders' Committee's proposals were defeated.
Thereafter, Michael T. Kanarellis, one of the members of the
Stockholders' Committee, submitted letters to various members of the Audit
Committee of the Company, alleging that "the Company's financial statements for
the fiscal year ended June 30, 1996 and the fiscal quarters ended September 30,
1996 and December 31, 1996 were false and materially misstated" and alleging
certain specific items of misstatement. The group also filed a suit against the
Company and its directors styled The Universal Seismic Associates, Inc.
Stockholders' Protective Committee, Michael T. Kanarellis, and Robert J. Kecseg
Vs.. Michael J. Pawelek, Ronald L. England, Calvin G. Cobb, Gary Milavec, Steven
Oakes, Rick Trapp, RIMCO Associates, L.P., Resource Investors Management
Company, L.P. and Universal Seismic Associates, Inc., in the United States
District Court of Delaware.
All parties entered into a Stipulation of Settlement which was tendered
to the Court on August 7, 1997, whereby RIMCO agreed to purchase all of the
shares of the Company Common Stock owned by the Stockholders' Committee for an
aggregate purchase price of $650,000, or $3.17 per share. Also in connection
with the settlement, RIMCO entered into a $2 million loan agreement with the
Company, with the proceeds being used to fund the immediate costs of settlement
and to pay other expenses associated with the lawsuit. The settlement was
approved by the Court on October 1, 1997, at which time the Court entered
judgment dismissing all claims with prejudice. The Company believes that it will
recover a substantial portion of its costs and expenses associated with the
settlement of the lawsuit from its directors' and officers' liability insurance
carrier.
See Item 6. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of the effects of this
lawsuit on the Company in the last fiscal year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Company's common stock trades on the NASDAQ National Market System
under the symbol "USAC". The following table sets forth, for the periods
indicated, the high and low closing sale prices for the Company's common stock
on the NASDAQ National Market System during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1997 1996
------------------------- ------------------------
HIGH LOW HIGH LOW
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
First Quarter $ 8 7/8 $ 5 1/4 $ 5 $ 2 7/8
Second Quarter 8 3/8 2 3/4 3 13/16 2 1/8
Third Quarter 5 /16 2 1/2 4 9/16 2 3/4
Fourth Quarter 4 3/16 1 9/16 5 7/8 3 7/8
</TABLE>
HOLDERS
On October 10, 1997, the last reported sales price of a share of the
Company's common stock on the NASDAQ National Market System was $2.875. On
October 10, 1997 there were approximately 48 shareholders of record of the
Company's common stock.
DIVIDENDS
The Company has never declared any dividends on its common stock and
does not anticipate paying dividends for the foreseeable future. The provisions
of certain of its financing agreements would prohibit the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On August 14, 1996, the Company exercised its right to convert $500,000
in 5% Convertible Notes due February 1, 1998 and issued to RIMCO on January 19,
1996, into 145,208 shares of Common Stock at a conversion price of $3.45 per
share. On September 30, 1996, the Company exercised its right to convert
$3,000,000 in 10% Senior Secured Exchangeable General Obligation Notes and
issued to RIMCO on January 19, 1996, into 795,754 shares of Common Stock at a
conversion price of $3.77 per share. On March 17, 1997, the Company issued 5,000
shares to Calvin G. Cobb, a director of the Company, pursuant to the exercise of
a stock option issued under the Company's Stock Incentive Plan. All of these
shares of Common Stock were issued in transactions exempt from registration
under Section 3(a)(9) or Section 4(2) of the Securities Act of 1933, as amended.
12
<PAGE> 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING REVENUE AND COSTS
As explained more fully in Note 3 to the Consolidated Financial
Statements, the Company has restated and reclassified its financial statements
for the years ended June 30, 1997 and 1996. All such changes are reflected in
the following management's discussion and analysis.
The fiscal 1997 revenues of $32,795,147 represent an increase of
approximately 38% over fiscal 1996 revenues of $23,798,371. The increased
revenues reflect gains in Data Acquisition activities. Data Acquisition revenues
increased by approximately 38% to $31,443,903 in 1997 due primarily to a full
year of operation of the Company's two most recently added 3-D acquisition
crews. These crews were placed in service in October 1995 and June 1996,
respectively. Data processing revenues remained relatively constant at
$1,237,930 in fiscal 1997 as compared to $1,087,000 in fiscal 1996. Oil and gas
revenues for fiscal 1997 were $113,314, which was the first year that the
Company had oil and gas sales. The Company does expect oil and gas revenues to
increase in fiscal 1998, although such increase is likely to be limited because
the Company currently lacks sufficient cash to conduct its drilling activities.
Operating expenses increased from $24,228,248 to $37,034,530, or
approximately 53%, in fiscal 1997. Direct costs of Data Acquisition increased by
approximately 45%, from $18,846,542 in fiscal 1996 to $27,408,064 in fiscal
1997, due to the Company's expanded 3-D crew operations. Direct costs of Data
Processing increased slightly from $893,715 in 1996 to $905,992 in fiscal 1997
as no significant changes in Data Processing operations took place. Gross
margins before depreciation for Data Acquisition operations declined to
approximately 13% in fiscal 1997 from approximately 17% in fiscal 1996, due
primarily to operational difficulties with certain seismic crews, increased
provision for doubtful accounts and continued competitive pressure on seismic
data acquisition pricing. Selling, general and administrative expenses increased
approximately 11% from $2,247,845 in fiscal 1996 to $2,488,787 in fiscal 1997
due primarily to increased costs of insurance and corporate office operating
expenses associated with the Company's expanded operations. In fiscal 1997, the
Company incurred $2,146,313 in non-recurring expenses related to the aborted
Suelopetrol merger and related proxy contest and shareholder litigation. For
further discussion, see Item 3. "Legal Proceedings". The expenses incurred were
as follows: (i) $301,230 relating to the aborted Suelopetrol merger and (ii)
$1,845,083 of legal, accounting and other costs related to the proxy contest and
subsequent litigation initiated by a shareholder, including uninsured settlement
costs. Also, in fiscal 1997 the Company decided to expense the remaining portion
of the operating lease for its obsolete Opseis 5586 data acquisition system
totaling $929,191. Depreciation and amortization increased by approximately 40%
from $2,240,146 in fiscal 1996 to $3,132,242 due primarily to equipment
additions related to the Company's crew expansion made during fiscal 1996 and
1997.
Interest expense increased by approximately 23%, from $1,071,454 in
fiscal 1996 to $1,317,793 in fiscal 1997. The increased interest resulted
primarily from equipment financing for the Company's Data Acquisition expansion
and borrowings for working capital for the expanded operations.
The Company reported a net loss of $5,524,163, or $(1.10) per share,
for fiscal 1997 as compared to a net loss of $1,484,434, or $(0.35) per share in
fiscal 1996. The current period net loss was primarily the result of (i) lower
gross margins from Data Acquisition activities that resulted from less than full
utilization of the Company's crews and operational difficulties on several
significant projects, (ii) the non-recurring expenses associated with the
aborted merger and related proxy contest and shareholder litigation, (iii) the
increase in provision for doubtful accounts and (iv) the obsolescence of the
Opseis data acquisition system. The proxy contest and shareholder litigation put
additional downward pressure on profits as substantial management resources were
diverted to manage the proxy contest and litigation. Management also believes
that, in some instances, the proxy fight and shareholder litigation has resulted
in damage to customer and
13
<PAGE> 16
other relationships which may result in lost business or require the Company to
bid seismic projects more aggressively than in the past to obtain a project. The
proxy contest and litigation also increased the difficulty of hiring crew
personnel which also put additional pressure on operational efficiency. Although
the Company is attempting to reduce its operating losses by increasing Data
Acquisition marketing efforts, improving Company and crew management and
staffing and otherwise attempting to increase the efficiency of its seismic
crews, it is anticipated that operations will continue to be conducted at a loss
in the near term.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company's cash and cash equivalents increased
by $877,246. This increase resulted from cash provided by operations of
$1,840,918, proceeds from the sale of assets of $1,494,457 and net cash provided
by financing activities of $4,648,192. Capital expenditures of $7,134,761 during
fiscal 1997 included $6,244,428 invested in oil and gas properties, $606,389 for
miscellaneous Data Acquisition equipment and $283,944 for Data Processing
equipment. The Company increased long-term debt obligations by $6,345,028 during
fiscal 1997. The Company incurred expenses relating to the aborted merger, proxy
contest and shareholder litigation of $2,146,313 in fiscal 1997 of which
approximately $602,000 was paid in fiscal 1997 and the remainder of which will
be paid in fiscal 1998.
In December 1996, UNEXCO entered into a $4,000,000 revolving line of
credit facility with RIMCO. In March 1997, the agreement was amended increasing
the revolving line to $5,500,000. Borrowings under the credit facility bear
interest at 12% per year and mature on December 1, 1999. On September 30, 1997,
the outstanding balance under this facility was $5,350,000.
In March 1997, the Company borrowed an additional $2,000,000 from RIMCO
for general working capital purposes. The note bears interest at 12% per year
and matures on December 1, 1999.
In August 1997, the Company borrowed an additional $2,000,000 from
RIMCO. The proceeds were utilized to fund the shareholder litigation settlement
and legal and accounting fees incurred as of a result of such litigation. The
Company expects to recover a substantial portion of its costs of the settlement
and expenses associated with the lawsuit from its directors' and officers'
liability insurance carrier. Any and all proceeds from insurance reimbursements
related to the litigation are required to be applied to amounts outstanding from
the borrowing. The note bears interest at 12% per year and matures on December
1, 1999.
Also, in August 1997, UNEXCO received $1,012,500 in exchange for the
reduction of its working interest in its Lake Boeuf Prospect from 37.5% to
20.625%.
The Company's other current liabilities balance increased by $1,570,812
from June 30, 1996 to June 30, 1997. The increase is primarily attributed to an
accrual for the shareholder litigation settlement and related expenses in the
amount of $1,205,000 net of the expected recovery from the Company's directors'
and officers' liability insurance carrier and accruals for other unresolved
disputes and various other pending litigation. As of June 30, 1997, the Company
had approximately $1,559,000 in trade accounts receivable over 90 days past due,
which as of September 30, 1997 had been reduced to $1,540,000. The Company
increased its allowance for doubtful accounts receivable to $721,697 as of June
30, 1997 as compared to $125,172 as of June 30, 1996, primarily because of
unresolved billings with two customers.
As of June 30, 1997, the Company had a cash balance of $1,859,677. If
losses from operations continue (as is anticipated), the Company believes this
cash, along with anticipated cash flow from its seismic and exploration and
production operations and funds available under its credit facilities, will not
be adequate for its overall working capital requirements. The Company believes
that it could generate substantial cash flow from its oil and gas properties if
it had sufficient funding of its drilling program. Future cash flows are subject
to a number of uncertainties, particularly the condition of the oil and gas
industry and related seismic
14
<PAGE> 17
activity in the Company's markets. Liquidity of the Company should be considered
in light of the significant fluctuations in demand that may be experienced by
seismic data acquisition contractors and exploration and production owners as
rapid changes in oil and gas producers' expectations and budgets occur. These
fluctuations can rapidly impact the Company's liquidity as supply and demand
factors directly affect utilization and contract revenues, which are primary
determinants of cash flow from the Company's operations.
As of June 30, 1997, the Company was in default on certain covenants of
its RIMCO financing agreements and RIMCO has waived such defaults and principal
and interest payment covenants through July 1, 1998. The Company is negotiating
an extension of this waiver and a debt-to-equity exchange with RIMCO whereby the
indebtedness to RIMCO, including accrued interest, would be converted into
equity and subordinated debt. In the original agreement with RIMCO, which was
executed on February 9, 1998 and expired on June 1, 1998, $15,000,000 was to be
converted into common stock of the Company and the balance into convertible
subordinated notes. The shares to be issued in the conversion were to be tied to
the average price of the Company's common stock for the 30-day period prior to
receiving stockholder approval. As of June 30, 1998, the Company was indebted to
RIMCO under the various financing agreements for $22,168,899 principal and
$1,896,450 accrued interest. As of June 30, 1997, the Company was also in
default under certain provisions of its financing agreement for its trade
receivables and was unsuccessful in obtaining a waiver. The Company still
received advances under the agreement until November 30, 1997, at which time, at
the Company's request, the agreement was terminated.
ITEM 7. FINANCIAL STATEMENTS
UNIVERSAL SEISMIC ASSOCIATES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants........................................................................F-1
Consolidated Balance Sheets as of June 30, 1997 and 1996........................................................F-2
Consolidated Statements of Operations for the years ended June 30, 1997 and 1996................................F-3
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1997 and 1996........................................................................................F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 1996................................F-5
Notes to Consolidated Financial Statements......................................................................F-6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See Item 1 "Description of Business - Significant Developments Since
June 30, 1996", the Company's Current Report on Form 8-K/A as filed with the
Securities and Exchange Commission on March 2, 1998 and the Company's Current
Report on Form 8-K as filed with the Securities and Exchange Commission on March
17, 1998 for discussions related to changes in and disagreements with
accountants on accounting and financial disclosure that have occurred since the
filing of the Company's Annual Report for the fiscal year ended June 30, 1997.
15
<PAGE> 18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
members of the Board of Directors and executive officers of the Company as of
October 10, 1997. Each of the directors is elected to serve until the next
annual meeting of stockholders or until his successor has been elected or
qualified. The executive officers have been elected to serve until his or her
successor is elected and qualified.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH COMPANY SINCE
- ---- --- --------------------- --------
<S> <C> <C> <C>
Michael J. Pawelek 39 President, Chief Executive Officer and Director 1992
Ronald L. England 39 Chief Financial Officer, Treasurer and Director 1994
Calvin G. Cobb 40 Director* 1993
Stephen F. Oakes 48 Director* 1996
Gary J. Milavec 35 Director* 1996
Peter B. Spooner 48 Senior Vice President
Patrick A. Donais 40 Vice President
Joe T. Rye 59 Chief Accounting Officer
</TABLE>
- ------------------
*Members of the Audit Committee
MICHAEL J. PAWELEK has served as President and a director of the
Company since January 1992 and was named Chief Executive Officer in December
1994. Mr. Pawelek is a director, President and CEO of Kentex Holdings, Inc.
("Kentex"), whose principal asset consists of all of the outstanding capital
stock of Sierra Management, Inc. ("Sierra"), of which he is also a director,
President and CEO. Sierra's principal asset is 1,170,000 shares of the Company.
RONALD L. ENGLAND has served as Chief Financial Officer and Treasurer
of the Company since January 1994 and has served as a director of the Company
since November 1994. Mr. England joined the Company in December 1992 and served
as Controller until January 1994. Between 1984 and 1992, Mr. England held
financial management positions with various seismic companies, including
Fairfield Industries, Inc. and PGI/Seis Pros. Mr. England is also a director and
Vice President and Secretary of Kentex and Sierra.
CALVIN G. COBB has served as a director of the Company since March
1993. Mr. Cobb also served as Chief Financial Officer and Treasurer of the
Company, on a temporary basis, from March through December 1993. Mr. Cobb is a
Managing Director of Corstone Corporation, a private merchant banking firm, with
whom he has been employed since August 1996. From September 1991 until July
1996, Mr. Cobb was a Senior Managing Director of The London Manhattan Company,
an investment banking firm.
STEPHEN F. OAKES has been a director of the Company since May 1996.
From 1989 to 1992, he served as Managing Director of Robert Fleming, Inc., an
investment banking company. He has been Managing Director of Resource Investors
Management Company Limited Partnership, an investment management company
specializing in the energy industry and the general partner of each of the RIMCO
partnerships, since 1992. Mr. Oakes also serves as a director of Dawson
Production Services, Inc.
16
<PAGE> 19
GARY J. MILAVEC has served as a director of the Company since February
1996. Since 1990, he has been associated with Resource Investors Management
Company Limited Partnership, first as a Vice President and presently as Managing
Director. Mr. Milavec also serves as a director of Texoil, Inc. and Brigham
Exploration Company, both of which are in the oil and gas exploration and
production business similar to that of UNEXCO.
PETER B. SPOONER has served as Senior Vice President, in charge of the
Company's seismic operations since May 1996. From December 1994 through April
1996, Mr. Spooner was Managing Director of Ozbo Exploration Services Pty. Ltd.,
during which time work was done for the Company on a project in Northwestern
Australia. From March 1986 until November 1994, Mr. Spooner was Director and
Joint General Manager of Digital Exploration Limited in Australia.
PATRICK A. DONAIS has served as Vice President - Geophysics of the
Company since July 1995. In January 1996 he also assumed the title of Vice
President - Exploration and Production of UNEXCO. Prior to joining the Company,
Mr. Donais was a staff geophysicist with Energy Development Corporation from May
1985 until April 1995. From April 1995 until July 1995 he was a consulting
geophysicist with the KelJor Group.
JOE T. RYE has served as Chief Accounting Officer of the Company since
August 1997. Prior to joining the Company, Mr. Rye served as a director and
Chief Financial Officer of Seagull Energy Corporation from June 1982 through
February 1992. From 1992 until joining the Company, Mr. Rye was a consultant to
energy and petrochemical companies and operated family businesses. Mr. Rye also
serves as a director of Penn Virginia Corporation, a company engaged in oil and
gas and coal leasing activities in Appalachia.
SECTION 16 (a) COMPLIANCE
Under Section 16 (a) of the Securities Exchange Act of 1934, directors,
certain officers and beneficial owners of 10% or more of the Company's Common
Stock are required from time to time to file with the SEC reports on Form 3, 4
or 5, relating principally to transactions in Company securities by such
persons. Based solely upon review of Forms 3 and 4 and amendments thereto
furnished to the Company during its fiscal year 1996 and thereafter, Forms 5 and
amendments thereto furnished to the Company with respect to its fiscal year
1996, and any written representations received by the Company from a director,
officer or beneficial owner of more than 10% of the Common Stock by the Company
("reporting persons") that no Form 5 is required, the Company believes that the
following reporting persons failed to file on a timely basis the following
reports required by Section 16(a) of the Securities and Exchange Act of 1934
during the Company's fiscal 1997 or prior years. Mr. Oakes was elected a
director in May 1996, and Mr. Spooner was elected an executive officer in May
1996, and neither filed the Form 3 reporting such event within ten days after
his election. Mr. Cobb received a warrant to purchase 15,000 shares on January
16, 1996, which was not reported on a Form 4 due February 10, 1996. In addition,
Mr. Donais received options to purchase 25,000 shares on February 19, 1996 and
sold 1,500 shares of stock on October 10, 1996, neither of which was reported on
a Form 4 due March 10, 1996 and November 10, 1996, respectively. Mr. England
assigned warrants to purchase 105,000 shares of Company stock to Kentex on
January 16, 1996, and neither party filed Form 4 for this change in beneficial
ownership.
17
<PAGE> 20
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects the aggregate compensation paid to the
Chief Executive Officer of the Company and to each of the Company's current
executive officers whose compensation exceeded $100,000 for services rendered
during any of the three fiscal years ended June 30, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Pawelek 1997 $ 156,174 $ -0- $8,250
President and Chief Executive
Officer 1996 $ 144,375 $ 20,681 $8,250
1995 $ 120,000 $ -0- $8,250
Ronald L. England 1997 $ 93,704 $ -0- $7,750
Chief Financial Officer and
Treasurer 1996 $ 89,625 $ 12,948 $7,750
1995 $ 67,750 $ -0- $7,750
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into written employment contracts with Michael J.
Pawelek and Ronald L. England for a term of two years beginning March 1, 1995,
with automatic renewals for additional terms of two years unless Mr. Pawelek or
Mr. England or the Company give notice at least 60 days prior to the expiration
of the initial term or any renewal term. These contracts, which were
automatically renewed in accordance with their respective aforedescribed terms
provide for minimum annual salaries of $120,000 for Mr. Pawelek and $72,000 for
Mr. England and annual discretionary incentive bonuses to be determined by the
Board of Directors. Salaries may be increased, but not decreased during the term
of the contract. If either is terminated for any reason other than "For Cause,"
as defined, or either individual terminates his employment for "Good Reason," as
defined, the Company will (i) continue to pay his then current salary and annual
bonus until the next succeeding December 31 on which the Company could have
terminated the term of the contract and (ii) pay immediately a lump sum equal to
the individual's then current annual salary and the amount of incentive bonus
paid or payable for the immediately preceding year. Each of the individuals is
also provided an automobile under the terms of their contract.
DIRECTORS' COMPENSATION
The Company pays each director who is not an officer or employee of the
Company a $5,000 annual fee and an attendance fee of $500 for each meeting of
the Board of Directors or any committee thereof that such director actually
attends. In addition, the Company reimburses directors for their reasonable
expenses incurred in attending meetings of the Board of Directors and its
committees. Messrs. Oakes and Milavec have waived director fees through June 30,
1997. Directors' compensation may be changed at any time by the Board of
Directors.
18
<PAGE> 21
Directors are eligible for the grant of options to purchase shares of
common stock of the Company under the 1995 Non-Employee Directors' Stock Option
Plan. As of October 10, 1997 options to purchase 10,000 shares at $4.06 per
share issued to Calvin G. Cobb were the only options outstanding.
The Company maintains directors' and officers' liability insurance, and
its Bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Delaware law.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table reflects the beneficial ownership of the Company
Common Stock as of October 10, 1997 with respect to (i) all persons known by the
Company to be the beneficial owner of more than five percent of the Company
Common Stock, (ii) directors and nominees for director of the Company and (iii)
directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Beneficial Ownership (1)
As of October 10, 1997
---------------------------
Name and Address of Beneficial Number Percent
Owner, Identity of Group of Shares of Class
- -------------------------------------- --------- --------
<S> <C> <C>
RIMCO Associates, Inc. 1,384,612 (2) 24.39%
600 Travis Street, Suite 6875
Houston, Texas 77002
Kentex Holdings, Inc. 1,170,000 (3) 21.91%
16420 Park Ten Place
Suite 300
Houston, Texas 77084-5051
Rick E. Trapp 1,190,700 (4) 22.30%
P.O. Box 3715
Egg Harbor City, New Jersey 08215
Directors
Michael J. Pawelek 1,172,000 (5) 21.95%
Calvin G. Cobb 35,000 (6) *
Ronald L. England 1,172,000 (7) 21.95%
Stephen F. Oakes 1,384,612 (8) 24.39%
Gary J. Milavec 0 (9) -
Directors and Executive Officers
as a group (8 persons) 2,773,612 46.32% (10)
</TABLE>
- ---------------------------
* Indicates less than one percent.
(1) Unless otherwise noted each shareholder has sole voting and dispositive
power with respect to the shares of Common Stock.
(2) Includes (i) 50,823 shares held of record, and 233,300 shares
purchasable within 60 days upon the exercise of warrants, by RIMCO
Partners, L.P., (ii) 488,488 shares held of record, and 89,516 shares
purchasable within 60 days upon the exercise of warrants, by RIMCO
Partners, L.P. II, (iii) 61,510 shares held of record, and 6,600 shares
purchasable within 60 days upon the exercise of warrants, by RIMCO
Partners, L.P. III, and (iv) 340,141 shares held of record, and 114,234
shares purchasable within 60 days upon the exercise of warrants, by
RIMCO Partners, L.P. IV. RIMCO Associates, Inc. is the sole general
partner of Resource Investors Management Company Limited Partnership,
which is the sole general partner of each of the RIMCO, and may
therefore
19
<PAGE> 22
be deemed to beneficially own all of the Company's common stock owned
by the RIMCO. After the transfer of the 205,300 shares of the Company
Common Stock pursuant to the settlement dated August 7, 1997 and
described in Item 3. "Legal Proceedings", RIMCO Associates, Inc. will
have beneficial ownership of 1,589,912 shares, or 27%, of the Company's
outstanding Common Stock assuming the warrants are exercised. The
transfer of those shares is subject to certain conditions.
(3) Includes 1,065,000 shares owned beneficially and of record by Sierra,
wholly owned by Kentex, and 105,000 shares purchasable within sixty
days pursuant to warrants immediately exercisable, 100,000 of which are
exercisable at a price of $3.75 per share and 5,000 of which are at a
price of $2.50 per share.
(4) Includes 20,700 shares owned beneficially and of record by Mr. Trapp
and 1,170,000 shares owned beneficially by Kentex. Mr. Trapp owns 40%
of Kentex's outstanding voting securities and is a director and officer
of Kentex, and may, therefore, be deemed to beneficially own all of the
Common Stock owned by Kentex.
(5) Includes 2,000 shares owned beneficially and of record by Mr. Pawelek
and 1,170,000 shares owned beneficially by Kentex. Mr. Pawelek owns 40%
of Kentex's outstanding voting securities and is a director and officer
of Kentex and may, therefore, be deemed to beneficially own all of the
Company's common stock owned by Kentex.
(6) Includes 5,000 shares owned beneficially and of record by Mr. Cobb and
5,000 shares purchasable within sixty days under options granted to
employees pursuant to the 1992 Stock Incentive Plan, 10,000 shares
purchasable within sixty days under options granted to directors
pursuant to the 1995 Non-Employee Directors' Stock Option Plan and
15,000 shares purchasable within sixty days under a warrant.
(7) Includes 2,000 shares owned beneficially and of record by Mr. England
and 1,170,000 shares owned beneficially by Kentex. Mr. England owns 20%
of Kentex's outstanding voting securities and is a director and officer
of Kentex and may, therefore, be deemed to beneficially own all of the
Company's common stock owned by Kentex.
(8) Includes 1,384,612 shares beneficially owned by RIMCO Associates, Inc.
and the RIMCO with respect to which Mr. Oakes shares voting rights.
(9) Excludes 1,384,612 shares beneficially owned by RIMCO Associates, Inc.
and the RIMCO with respect to which Mr. Milavec has disclaimed
beneficial ownership.
(10) Includes 310,000 shares of Common Stock purchasable within 60 days
under options and warrants granted to various directors and officers,
1,384,612 shares beneficially owned by RIMCO Associates, Inc. with
respect to which Mr. Oakes shares voting rights (443,650 purchasable
within 60 days pursuant to warrants immediately exercisable) and
1,170,000 shares owned beneficially by Kentex (105,000 purchasable
within 60 days pursuant to warrants immediately exercisable). Mr.
Pawelek and Mr. England collectively own 60% of the outstanding voting
securities of Kentex and are each executive officers and directors of
Kentex and may, therefore, be deemed to beneficially own all of the
Company's common stock owned by Kentex. After the transfer of the
205,300 shares of the Company Common Stock pursuant to the settlement
dated August 7, 1997 and described in Item 3. "Legal Proceedings",
Directors and Officers as a group will have beneficial ownership of
2,978,912 shares, or 49.75%, of the
20
<PAGE> 23
Company's outstanding Common Stock. The transfer of those shares is
subject to certain conditions. The address for each of the officers and
directors of the Company is 16420 Park Ten Place, Suite 300, Houston,
Texas 77084-5051.
CHANGE IN CONTROL
A number of events occurred in fiscal 1997 and thereafter which may
effect or have effected a change in control of the Company. Because the Company
has defaulted on substantially all of its credit facilities, incurred large
operating losses from its data acquisition operation, lacks sufficient funding
for its oil and gas and seismic operations, and has limitations on sources of
additional capital, the Company has retained Morgan Keegan in August 1997 to
assist it in determining its strategic alternatives and developing
recommendations to attempt to maximize shareholder value. This activity did not
produce any results deemed acceptable by the Board of Directors.
Since January 1996, RIMCO has been a principal shareholder and lender
and has had two nominees serving on the Board of Directors of the Company. As a
result of the agreed purchase by RIMCO of 205,300 shares of Common Stock in
connection with the settlement of the shareholder litigation and the conversion
by the Company of $3,500,000 in debt owed by the Company to RIMCO into an
aggregate of 940,962 shares of Common Stock, RIMCO has or will have record
ownership of 1,146,262 shares of Common Stock, or 22% of the issued and
outstanding Common Stock of the Company on October 10, 1997. RIMCO also has the
right to acquire at an aggregate price of $1,911,350 up to an additional 443,650
shares of Common Stock under currently exercisable warrants, which could
increase RIMCO's holdings to 27% of the issued and outstanding Common Stock of
the Company. In addition, since June 30, 1996 the Company has entered into three
new credit facilities with RIMCO for an aggregate of $9,500,000, which when
combined with prior RIMCO loans aggregated $18,182,516 at September 30, 1997, or
in excess of 90% of the Company's debt at such date. RIMCO's debt is secured by
substantially all of the assets of the Company. The Company is in default on
numerous material covenants in its credit facilities with RIMCO, including
payment covenants. RIMCO has waived the Company's defaults under the covenants
including payment of principal and interest until July 1, 1998. RIMCO has waived
or modified these covenants to give the Company additional time and flexibility
to pursue the strategic alternatives described above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions between the Company and its officers, directors and
principal stockholders or affiliates of any of them have been and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties. Approval of a majority of disinterested members of the Board of
Directors will be required for any transaction between the Company and its
officers, directors or affiliates. Any future loans from the Company to its
officers, directors, key employees or their affiliates will be approved by a
majority of the independent and disinterested directors.
The Company has performed seismic services for Energy Arrow, for which
Matthew R. Bob, a former director of the Company, is President and an owner. In
fiscal 1996, the Company received approximately $1,201,000 for seismic services
performed for Energy Arrow under various contracts.
The Company had net unpaid advances of $76,440 due from Sierra
Management, Inc., a company partially owned by Messrs. Pawelek and England, as
of July 1, 1995. This amount was repaid by payments of $48,000 and $28,440 on
September 30, 1995 and 1996, respectively. Payments were without interest.
21
<PAGE> 24
On February 1, 1996, the Company entered into a consulting agreement
with Mr. Billy E. Trapp, the former President of the Company who retired from
full time employment in March 1991 (the "Billy Trapp Consulting Agreement").
Pursuant to the Billy Trapp Consulting Agreement, the Company pays Mr. Trapp
$4,000 per month and provided group insurance for Mr. Trapp and his wife for his
services as a consultant to the Company for a term of ten years, provided that
the Company may terminate the agreement for good cause. In connection with the
Billy Trapp Consulting Agreement, Mr. Trapp and his wife executed a release
agreement whereby each jointly and severally released the Company, Sierra and
their respective affiliates, officers, directors, employees and representatives
from any liabilities or claims related to a certain letter agreement regarding
advisory and consulting services dated February 14, 1992 between Mr. Trapp and
the Company, a certain letter agreement for consulting services, stock
assignment, termination of stock options and group life insurance coverages
dated February 14, 1992 by Mr. Trapp, with a joinder by Mrs. Trapp, and any
other agreements or relationships between Mr. Trapp and/or Mrs. Trapp and the
Company and/or Sierra. In connection with amending the consulting agreement, the
Company issued Mr. Trapp warrants to purchase 37,500 shares of common stock at
$3.75 per share. Billy E. Trapp is the father of Rick E. Trapp, the Company's
former Chief Executive Officer and Chairman of the Board.
On December 15, 1994, the Company entered into a consulting agreement
with Rick E. Trapp, the former Chief Executive Officer and Chairman of the Board
of Directors, for a term of three years (the "Rick Trapp Consulting Agreement").
The Rick Trapp Consulting Agreement provided for (i) a monthly fee of $10,000 to
be paid to Mr. Trapp, and (ii) a covenant not to engage in certain activities in
competition with the Company for a period of six months following termination of
the agreement. On September 22, 1996, Mr. Trapp and the Company agreed to
terminate the Rick Trapp Consulting Agreement. In connection therewith (i) the
Company agreed to pay to Mr. Trapp the sum of $40,000, payable in four equal
monthly installments commencing on October 1, 1996, and (ii) Mr. Trapp executed
a release and waiver agreement pursuant to which Mr. Trapp agreed to release the
Company and its affiliates, officers, directors, employees and representatives
from any and all liability and claims related to Mr. Trapp's employment with the
Company, the termination of Mr. Trapp's employment, the Rick Trapp Consulting
Agreement and any other agreements and relationships between the Company and Mr.
Trapp. The release and waiver agreement further provided that Mr. Trapp not
compete with the Company nor solicit any employee, agent or representative of
the Company for a period of one year thereafter. The Company paid Mr. Trapp for
four additional months as a result of work performed by him (a total of $110,000
in fiscal 1997) and paid for his and his wife's group insurance through May 31,
1997.
On January 19, 1996, the Company entered into a financing arrangement
with RIMCO providing up to $7,000,000, of which $4,000,000 was immediately
funded, to restructure existing debt. Messrs. Oakes and Milavec are employees of
RIMCO's general partner. The debt restructure consisted of (i) $3,500,000 in 10%
Senior Secured General Obligation Notes payable in 48 equal monthly installments
of principal plus interest (payments due after June 30, 1997, extended to
December 1, 1997), and (ii) $500,000 in 5% Convertible Notes maturing on
February 1, 1998, with monthly payments of interest, convertible into common
stock of the Company (the "Convertible Notes") at a conversion price of $3.45
per share, subject to adjustment. The remaining $3,000,000 was subsequently
funded under 10% Senior Secured Exchangeable General Obligation Notes, which
were exchangeable for common stock of the Company (the "Exchangeable Notes") at
an exchange price of $3.77 per share, subject to adjustment. The proceeds were
used to finance the Company's exploration and production activities. In
connection with this financing arrangement, the Company issued to RIMCO warrants
to purchase 165,000 shares of the Company's common stock at a purchase price of
$3.14 per share, subject to adjustment. On August 14, 1996, the Company
exercised its right to convert the Convertible Notes into 145,208 shares of the
common stock of the Company. On September 30, 1996, the Company exercised its
right to exchange the Exchangeable Notes for 795,754 shares of the Company's
common stock.
22
<PAGE> 25
On May 28, 1996, the Company entered into an additional credit facility
with RIMCO pursuant to which the Company issued 10% Senior Secured General
Obligation Notes in the aggregate principal amount of $6,500,000. The proceeds
were used to acquire new seismic equipment and retire some existing debt. The
notes provide for monthly payments of interest only until November 1, 1996
(extended to July 1, 1998), then $138,106, including interest, with the balance
due December 1, 1999, and are secured by the Company's seismic equipment. In
connection with this credit facility, the Company issued to RIMCO warrants to
purchase 278,650 shares of the Company's common stock at a purchase price of
$5.00 per share, subject to adjustment.
On December 20, 1996, the Company entered into another financing
agreement with RIMCO to provide $4,000,000 (increased to $5,500,000 on March 27,
1997) under a revolving credit facility for the expansion of the Company's
exploration and production activities ($5,350,000 outstanding at June 30, 1997).
RIMCO has the right of approval on any property that funds are advanced toward.
The financing agreement is secured by the Company's oil and gas properties.
On March 27, 1997, the Company borrowed an additional $2,000,000 from
RIMCO under new 12% Senior Secured General Obligation Notes with interest
payable monthly (interest due after June 30, 1997, has been deferred to July 1,
1998) and principal due December 1, 1999. The proceeds were used for working
capital. The notes are secured by the Company's seismic equipment.
On August 6, 1997, the Company borrowed an additional $2,000,000 from
RIMCO under another 12% Senior Secured General Obligation Note, also secured by
the Company's seismic equipment, with interest payable monthly (extended to July
1, 1998) and principal due December 1, 1999. The proceeds were used to fund the
shareholder settlement described under "Legal Proceedings".
Employees of RIMCO's general partner introduced the Company to the
operator of the Lake Boeuf and the East Holly Beach prospects, and on April 17,
1996, the Company entered into agreements to acquire an interest in both
prospects. On May 14, 1996, the Company and affiliates of RIMCO entered into an
agreement for the RIMCO affiliates to pay the Company for 25% of its costs
incurred and to participate on the same basis as the Company as to 25% of the
Company's then interest in the two prospects. In August 1996, the Company sold a
portion of its remaining interest in the Lake Boeuf prospect to an unaffiliated
party. The Company and affiliates of RIMCO also participate in the West Refugio
prospect as non-operator, on similar terms.
RIMCO has waived the Company's defaults under the covenants in its
various financing agreements until July 1, 1998. It has also deferred payments
of interest and principal due after June 30, 1997 until July 1, 1998. As of
September 30, 1997, the Company was indebted to RIMCO under the various
financing agreements for $18,182,516 principal and $501,830 accrued interest.
The Company and Brigham Exploration Company both participate in the
Southwest Danbury prospect. Mr. Milavec is a director of both companies. In
addition, the Company and Texoil, Inc. both participate in the Daniel Ranch and
Refugio prospects. Mr. Milavec is a director of both of these companies.
As of March 1, 1997, the Company entered into an agreement with
Corstone Corporation, a business in which Calvin G. Cobb is a managing director,
to provide investor relations and corporate communication services. The term of
the agreement is one year and provides for a monthly fee of $9,500.
The shareholder litigation described in Item 3. "Legal Proceedings"
involved claims against the individual directors, in addition to the Company
itself, all of which were settled by the Company on behalf of itself and its
directors. The Company incurred approximately $1.85 million in legal, accounting
23
<PAGE> 26
and other costs to defend the lawsuit, a portion of which it believes may
eventually be recovered from its directors' and officers' liability insurance
carrier.
FORWARD-LOOKING STATEMENTS
Statements included in this report which are not historical facts
(including any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions related thereto) are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933,
as amended. In addition, the Company and its representatives may from time to
time make other oral or written statements which are also forward-looking
statements.
Such forward-looking statements include, among other things, statements
regarding development activities, capital expenditures, acquisitions and
dispositions, drilling and exploration programs, projected quantities of future
oil and gas production, costs and expenditures as well as projected demand for
seismic acquisition and processing services and oil and gas, which will affect
sales levels, prices and margins realized by the Company.
These forward-looking statements are made based upon management's
current plans, expectations, estimates, assumptions and beliefs concerning
future events impacting the Company and, therefore, involve a number of risks
and uncertainties. The Company cautions that forward-looking statements are not
guarantees and that actual results could differ materially from those expressed
or implied in the forward-looking statements.
Important factors that could cause the actual results of operations or
financial condition of the Company to differ include, but are not necessarily
limited to: the cost of finding and successfully developing oil and gas
reserves, production levels of its seismic crews, the demand for the Company's
3-D seismic data acquisition and processing services, the price for which such
reserves and services can be sold, the volatility of commodity prices for oil
and gas, the inability to raise new capital through financings or sale of
interests in its oil and gas properties, unanticipated geological problems, the
occurrence of unusual weather or operating conditions including force majeure,
the failure of equipment or processes to operate in accordance with
specifications or expectations, delays in anticipated start-up dates,
environmental risks affecting the drilling and producing of oil and gas wells,
the timing of receipt of necessary governmental permits, labor relations and
costs, accidents, changes in governmental regulation or enforcement practices,
risks and uncertainties relating to general domestic and international economic
(including inflation and interest rates) and political conditions, the
experience and financial condition of joint venture partners and changes in
financial market conditions. Many of such factors are beyond the Company's
ability to control or predict. Readers are cautioned not to put undue reliance
on forward-looking statements.
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and financial
condition in connection with the preparation of Management's Discussion and
Analysis of Financial Condition and Results of Operations and certain other
sections contained in the Company's quarterly, annual and other reports filed
with the Securities and Exchange Commission, the Company does not intend to
publicly review or update any particular forward-looking statement, whether as a
result of new information, future events or otherwise.
As noted elsewhere, the Company's Annual Report on Form 10-KSB as filed
with the Securities and Exchange Commission for fiscal year ended June 30, 1997
is amended by this Form 10-KSB/A to reflect the audits and restatements of the
Company's 1997 and 1996 financial statements. Certain forward-looking statements
as of October 20, 1997, the date of the filing of the Company's Annual Report on
Form 10-KSB, have been superseded by subsequent events. The Company has not
updated such forward-looking statements to reflect those subsequent events.
24
<PAGE> 27
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The right hand column reflects the filing in which the
exhibits have heretofore been filed with the Securities and
Exchange Commission. The left-hand column reflects the exhibit
number in these filings except where noted in parenthesis by
them. Exhibits so referenced are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number File No.
------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company 33-46235
3.2 Amended and Restated Bylaws of the Company 33-57994
4.1 Form of Stock Certificate 33-46235
10.2 Employment Agreement between the Company and Michael
J. Pawelek effective March 1, 1995 33-46235
10.3 Form of Indemnification Agreement between the Company
and directors and certain officers 33-46235
10.4 Stock Incentive Plan 33-46235
10.5 1994 Employee Stock Option Plan (Ex. 4.2) 33-79448
10.6 1995 Non-Employee Directors' Stock Option Plan 96-10KSB
10.13 Office space lease between Park Ten No. 1, Ltd. and
Universal Seismic Associates, Inc. 96-10KSB
10.14 Loan and Security Agreement between Fidelity Funding, Inc.
and the Company 96-10KSB
10.15 Note Purchase Agreement dated as of January 19, 1996 by
and between the Company, RIMCO Partners, L.P., RIMCO Partners,
L.P.II, RIMCO Partners, L.P.III and RIMCO Partners, L.P.IV,
("RIMCO")(RIMCO #1) 96-10KSB
10.15 First Amendment to RIMCO #1 Note Purchase Agreement dated as of May
28, 1996 by and between the Company and RIMCO 97-10KSB/A
10.15 Second Amendment to RIMCO #1 Note Purchase Agreement
dated as of August 13, 1996 97-10KSB/A
10.15 Third Amendment to RIMCO #1 Note Purchase Agreement 12/31/96 -
dated as of December 20, 1996 10QSB
10.15 Fourth Amendment to RIMCO #1 Note Purchase Agreement 03/31/97 -
dated as of March 27, 1997 (Ex.1.4) 10QSB
10.15 Fifth Amendment to RIMCO #1 Note Purchase Agreement
dated as of August 6, 1997 97-10KSB/A
10.16 Note Purchase Agreement dated as of January 19, 1996 by and
between UNEXCO and RIMCO Partners, L.P.II, RIMCO
Partners L.P.III. and RIMCO Partners, L.P.IV 96-10KSB
10.16.1 First Amendment to Note Purchase Agreement dated as of May
28, 1996 by and between UNEXCO and RIMCO Partners,
L.P. II, RIMCO Partners L.P.III, RIMCO Partners L.P.IV 96-10KSB/A
10.17 Stock Ownership and Registration Rights Agreement by and
between the Company, UNEXCO and RIMCO 96-10KSB
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number File No.
------- --------
<S> <C> <C>
10.17.1 First Amendment to Stock Ownership and Registration Rights
Agreement, dated as of May 28, 1996 96-10KSB/A
10.18 Warrant Agreement dated January 19, 1996 by and between the
Company and RIMCO 96-10KSB
10.19 Guaranty and Exchange Agreement dated January 19, 1996 by
and between UNEXCO and RIMCO 96-10KSB/A
10.19.1 First Amendment to Guaranty and Exchange Agreement dated
May 28, 1996 by and between UNEXCO and RIMCO 96-10KSB
10.20 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO partners, L.P. for the
purchase of 57,750 shares of the Company's Common Stock 96-10KSB
10.21 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.II for the
purchase of 57,750 shares of the Company's Common Stock 96-10KSB
10.22 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.III for the
purchase of 6,600 shares of the Company's Common Stock 96-10KSB
10.23 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.IV for the
purchase of 42,900 shares of the Company's Common Stock 96-10KSB
10.24 Note Purchase Agreement dated as of May 28, 1996 by and
between the Company and RIMCO (RIMCO #2) 96-10KSB
10.24.1 First Amendment to RIMCO #2 Note Purchase Agreement 12/31/96 -
dated as of December 20, 1996 10QSB
10.24.2 Second Amendment to RIMCO #2 Note Purchase Agreement 03/31/97 -
dated as of March 27, 1997 (Ex.1.5) 10QSB
10.24 Third Amendment to RIMCO #2 Note Purchase Agreement
dated as of August 6, 1997 97-10KSB
10.25 Warrant Agreement dated May 28, 1996 by and between the
Company and RIMCO 96-10KSB
10.26 Common Stock Purchase Warrant executed May 28, 1996 by
the Company in favor of RIMCO Partners, L.P. for the
purchase of 175,550 shares of the Company's Common Stock 96-10KSB
10.27 Common Stock Purchase Warrant executed May 28, 1996 by the
Company in favor of RIMCO Partners, L.P.II for the
purchase of 31,766 shares of the Company's Common Stock 96-10KSB
10.28 Common Stock Purchase Warrant executed May 28, 1996 by the
Company in favor of RIMCO Partners, L.P.III for the
purchase of 71,334 shares of the Company's Common Stock 96-10KSB
10.29 Amended and Restated Note Purchase Agreement dated March 03/31/97 -
27, 1997 between UNEXCO and RIMCO (Ex.1.1) 10QSB
10.30 Amended and Restated Note Purchase Agreement dated March 03/31/97 -
27, 1997 between UNEXCO and RIMCO (Ex.1.2) 10QSB
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number File No.
------- --------
<S> <C> <C>
10.31 Amended and Restated Pledge Agreement dated March 27, 03/31/97 -
1997 between the Company and RIMCO (Ex.1.3) 10QSB
10.32 Note Purchase Agreement dated as of March 27, 1997 between 03/31/97 -
the Company and RIMCO (Ex. 1.6) 10QSB
10.32.1 First Amendment to Note Purchase Agreement dated as of
August 6, 1997 97-10KSB
10.32.2 Note Purchase Agreement dated as of August 6, 1997 between
the Company and RIMCO 97-10KSB
10.33 Employment Agreement between the Company and Ronald L.
England effective March 1, 1995 97-10KSB
10.34 Employment Agreement between the Company and Peter B.
Spooner effective March 31, 1996 97-10KSB
10.35 Employment Agreement between the Company and Patrick
A. Donais effective August 1, 1997 97-10KSB
10.36 Employment Agreement between the Company and Joe T. Rye
dated August 7, 1997 97-10KSB
10.37 Warrant to Purchase Shares of Common Stock executed
January 12, 1996 in favor of Ronald L. England for purchase
of 5,000 shares of the Company's Common Stock 97-10KSB
10.38 Warrant to Purchase Shares of Common Stock executed
January 12, 1996 in favor of Ronald L. England for purchase
of 100,000 shares of the Company's Common Stock 97-10KSB
10.39 Warrant to Purchase Shares of Common Stock executed
January 16, 1996 in favor of Calvin G. Cobb for purchase of
15,000 shares of the Company's Common Stock 97-10KSB
10.40 Seismic equipment lease between NYNEX Credit Company
and the Company dated as of October 2, 1995 97-10KSB
10.41 Settlement Agreement and General Release dated effective
August 5, 1997 by and among The Universal Seismic
Associates, Inc. Stockholders' Protective Committee, Michael
T. Kanarellis, and Robert J. Kecseg, Michael J. Pawelek, Ronald
L. England, Calvin G. Cobb, Gary Milavec, Stephen Oakes,
Rick E. Trapp, Universal Seismic Associates, Inc., RIMCO
Associates, Inc. and Resource Investors Management Company
Limited Partnership. 97-10KSB
21.1 Subsidiaries of the Company 97-10KSB
23.2 Consent of Netherland, Sewell & Associates, Inc. 97-10KSB
27 Financial Data Schedule (included only in the electronic
filing of this document)
</TABLE>
- -------------
(b) REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the fiscal
quarter ended June 30, 1997.
27
<PAGE> 30
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
UNIVERSAL SEISMIC ASSOCIATES, INC.
By: /s/ Joe T. Rye
-------------------------------------
Joe T. Rye
President and Chief Executive Officer
Date: July 2, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/S/ MICHAEL J. PAWELEK July 2, 1998
- -----------------------------------------------------
Michael J. Pawelek, President, Chief Executive
Officer, and Director
/s/ GARY J. MILAVEC July 2, 1998
- -----------------------------------------------------
Gary J. Milavec, Director
/s/ STEPHEN F. OAKES July 2, 1998
- -----------------------------------------------------
Stephen F. Oakes, Director
/s/ JOE T. RYE July 2, 1998
- -----------------------------------------------------
Joe T. Rye, Chief Accounting Officer
</TABLE>
28
<PAGE> 31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Universal Seismic Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Universal
Seismic Associates, Inc. and Subsidiaries (a Delaware corporation) as of June
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Universal Seismic Associates,
Inc. and Subsidiaries, as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations of
$4,239,383 and $429,877 during the years ended June 30, 1997 and 1996,
respectively, and has an accumulated deficit and a net working capital
deficiency of $11,834,660 and $1,626,985, respectively, as of June 30, 1997, all
of which raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Houston, Texas /s/ Arthur Andersen LLP
June 30, 1998
F-1
<PAGE> 32
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,859,677 $ 982,431
Accounts receivable, net 5,579,876 5,608,882
Costs and estimated earnings in excess of billings on uncompleted contracts 702,066 3,278,086
Prepaid expenses and other current assets 498,982 626,254
------------ ------------
Total current assets 8,640,601 10,495,653
Property and equipment, net
Seismic property and equipment 15,896,535 17,953,678
Oil and gas properties, full cost method 6,881,115 2,166,730
------------ ------------
Total property and equipment, net 22,777,650 20,120,408
Other assets:
Goodwill, net 601,694 652,538
Other 228,088 427,612
------------ ------------
829,782 1,080,150
Total assets $ 32,248,033 $ 31,696,211
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 1,423,859 $ 4,960,447
Billings in excess of costs and estimated earnings on uncompleted contracts 499,916 2,267,896
Accounts payable 5,912,647 6,000,156
Accrued and other current liabilities 2,431,164 860,352
------------ ------------
Total current liabilities 10,267,586 14,088,851
Long-term obligations, net of current maturities 16,729,140 10,384,112
------------ ------------
Total liabilities 26,996,726 24,472,963
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 20,000,000 shares authorized; 5,239,109 and
4,283,147 shares issued and 5,234,109 and 4,278,147 shares outstanding 523 428
Additional paid in capital 17,105,444 13,553,317
Accumulated deficit (11,834,660) (6,310,497)
Less: Treasury stock, at cost; 5,000 shares (20,000) (20,000)
------------ ------------
Total stockholders' equity 5,251,307 7,223,248
------------ ------------
Total liabilities and stockholders' equity $ 32,248,033 $ 31,696,211
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 33
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating revenues:
Data acquisition $ 31,443,903 $ 22,711,371
Data processing 1,237,930 1,087,000
Oil and gas 113,314
------------ ------------
Total operating revenues 32,795,147 23,798,371
------------ ------------
Operating expenses:
Cost of data acquisition 27,408,064 18,846,542
Cost of data processing 905,992 893,715
Oil and gas operating 23,941
Selling, general and administrative 2,488,787 2,247,845
Cost of aborted merger, proxy contest and shareholder litigation 2,146,313
Operating lease recognition (Note 6) 929,191
Depreciation, depletion and amortization 3,132,242 2,240,146
------------ ------------
Total operating expenses 37,034,530 24,228,248
------------ ------------
Total operating loss (4,239,383) (429,877)
Interest expense, net of capitalized interest (1,317,793) (1,071,454)
Other income 33,013 16,897
------------ ------------
Net loss $ (5,524,163) $ (1,484,434)
============ ============
Net loss per share $ (1.10) $ (0.35)
============ ============
Weighted average common shares outstanding 5,012,732 4,212,596
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 34
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
-------------------------- -------------------------- PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 1, 1995 4,202,498 $ 421 5,000 $ (20,000) $ 13,183,172 $ (4,826,063) $ 8,337,530
Net loss (1,484,434) (1,484,434)
Issuance of detachable 100,000 100,000
stock warrants
Exercise of stock
options 75,649 7 270,145 270,152
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 1996 4,278,147 428 5,000 (20,000) 13,553,317 (6,310,497) 7,223,248
Net loss (5,524,163) (5,524,163)
Exercise of stock options
Exercise of convertible 15,000 1 51,249 51,250
and exchangeable notes 940,962 94 3,500,878 3,500,972
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 1997 5,234,109 $ 523 5,000 $ (20,000) $ 17,105,444 $(11,834,660) $ 5,251,307
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 35
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,524,163) $ (1,484,434)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation, depletion and amortization 3,132,242 2,240,146
Loss on disposal of assets -- 1,333
Accrued loss on operating lease 929,191 --
Changes in operating assets and liabilities:
Accounts receivable, net 29,006 (1,817,057)
Costs and estimated earnings in excess of billings on uncompleted
contracts 2,576,020 (3,171,502)
Prepaid expenses and other current assets 842,771 561,324
Accounts payable (87,509) 4,039,277
Billings in excess of costs and estimated earnings on uncompleted
contracts (1,767,980) 1,865,149
Accrued and other current liabilities 1,584,284 (22,456)
Other assets 127,056 (147,475)
------------ ------------
Net cash provided by operating activities 1,840,918 2,064,305
------------ ------------
Cash flows from investing activities:
Capital expenditures (7,134,761) (3,198,511)
Proceeds from sale of assets 1,494,457 29,840
Proceeds from receivable from stockholder 28,440 48,000
------------ ------------
Net cash used in investing activities (5,611,864) (3,120,671)
------------ ------------
Cash flows from financing activities:
Proceeds from debt and obligations 30,374,414 32,507,930
Payments on debt and obligations (25,764,972) (32,047,642)
Proceeds from issuance of common stock 38,750 270,152
Proceeds from issuance of stock warrants -- 100,000
------------ ------------
Net cash provided by financing activities 4,648,192 830,440
------------ ------------
Net increase (decrease) in cash and cash equivalents 877,246 (225,926)
Cash and cash equivalents at beginning of period 982,431 1,208,357
------------ ------------
Cash and cash equivalents at end of period $ 1,859,677 $ 982,431
============ ============
Supplemental disclosures:
Cash paid for interest $ 1,767,245 $ 1,016,425
Equipment acquired in exchange for notes payable 98,336 7,504,899
Prepaid expenses financed by notes payable 671,471 616,272
Conversion of long-term obligations to common stock 3,500,972 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 36
UNIVERSAL SEISMIC ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. LIQUIDITY AND OPERATING LOSSES:
The accompanying consolidated financial statements have been prepared
assuming that Universal Seismic Associates, Inc. and Subsidiaries (the
"Company) will continue as a going concern. As more fully explained
below, the Company has suffered recurring losses from operations of
$4,239,383 and $429,877 for the years ended June 30, 1997 and 1996,
respectively, and has an accumulated deficit and a net working capital
deficiency of $11,834,660 and $1,626,985, respectively, as of June 30,
1997.
As of June 30, 1997, the Company had a cash balance of $1,859,677. If
losses from operations continue (as is anticipated), the Company
believes this cash, along with anticipated cash flow from its seismic
and exploration and production operations and funds available under its
credit facilities, will not be adequate for its overall working capital
requirements. The Company believes that it could generate substantial
cash flow from its oil and gas properties if it had sufficient funding
of its drilling program. Future cash flows are subject to a number of
uncertainties, particularly the condition of the oil and gas industry
and related seismic activity in the Company's markets. Liquidity of the
Company should be considered in light of the significant fluctuations
in demand that may be experienced by seismic data acquisition
contractors and exploration and production owners as rapid changes in
oil and gas producers' expectations and budgets occur. These
fluctuations can rapidly impact the Company's liquidity as supply and
demand factors directly affect utilization and contract revenues, which
are primary determinants of cash flow from the Company's operations.
As of June 30, 1997, the Company was in default on certain covenants of
its RIMCO (see Note 6) financing agreements and RIMCO has waived such
defaults and principal and interest payment covenants through July 1,
1998. The Company is negotiating an extension of this waiver and a
debt-to-equity exchange with RIMCO whereby the indebtedness to RIMCO,
including accrued interest, would be converted into equity and
subordinated debt. In the original agreement with RIMCO, which was
executed on February 9, 1998 and expired on June 1, 1998, $15,000,000
was to be converted into common stock of the Company and the balance
into convertible subordinated notes. The shares to be issued in the
conversion were to be tied to the average price of the Company's common
stock for the 30-day period prior to receiving stockholder approval. As
of June 30, 1998, the Company was indebted to RIMCO under the various
financing agreements for $22,168,899 principal and $1,896,450 accrued
interest (unaudited). As of June 30, 1997, the Company was also in
default under certain provisions of its financing agreement for its
trade receivables and was unsuccessful in obtaining a waiver. The
Company still received advances under the agreement until November 30,
1997, at which time, at the Company's request, the agreement was
terminated.
The above factors raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of
assets carrying amounts or the amount and classification of liabilities
that might result should the Company be unable to continue as a going
concern.
F-6
<PAGE> 37
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
Organization and Principles of Consolidation
The Company is engaged primarily in land geophysical services. These
services include the contract acquisition of three-dimensional seismic
data and the processing and reproduction of seismic data. The Company
also participates in oil and gas exploration, development, and
production activities. The consolidated financial statements are
presented after all significant intercompany accounts and transactions
have been eliminated.
Revenue Recognition
The Company recognizes revenue on fixed price contracts on the basis of
percentage of completion with no profit recognized until sufficient
progress has been made to adequately assess the estimate of profit
recognition. When estimated total costs on any contract indicates a
loss, the entire amount of the loss is recognized immediately.
Property and Equipment
Property and equipment, other than oil and gas properties, are stated
at cost and are depreciated on the straight-line method over the
estimated useful lives of the assets, which range from three to ten
years. Maintenance and repairs are charged against income when
incurred, and renewals or betterments are capitalized. Upon retirement
or other disposal of fixed assets, the cost and related accumulated
depreciation are removed from the respective accounts, and any gains or
losses are included in results of operations. The Company had fully
depreciated property and equipment which was still being utilized in
the amounts of $543,000 and $502,000 at June 30, 1997 and June 30,
1996, respectively.
The Company follows the full cost method of accounting for oil and gas
activities. Under this method of accounting, all costs incurred in the
acquisition, exploration, and development of oil and gas properties,
including costs incurred by the Company's own data acquisition
subsidiary, are capitalized. Such capitalized costs and estimated
future development and dismantlement costs are amortized on a
unit-of-production method based on proved reserves. Net capitalized
costs of oil and gas properties are limited to the lower of unamortized
costs or the cost center ceiling, defined as the sum of the present
value (10% discount rate) of estimated unescalated future net revenues
from proved reserves; plus the cost of properties not being amortized,
if any; plus the lower of cost or estimated fair value of unproved
properties included in the costs being amortized, if any; less related
income tax effects. Disposition of oil and gas properties are recorded
as adjustments to capitalized costs, with no gain or loss recognized
unless such adjustments would significantly alter the relationship
between capitalized costs and proved reserves. A large portion of the
capitalized costs related to the Company's oil and gas activities are
created by the Company's data acquisition business. All intercompany
profit has been eliminated.
Unevaluated properties and associated costs not being amortized and
included in oil and gas properties were $3,839,390 and $2,166,730 at
June 30, 1997 and 1996, respectively. The properties represented by
these costs were at such dates undergoing exploration or development
activities, or are properties on which the Company intends to commence
such activities in the future, assuming sufficient funding is
available. The Company believes that the unevaluated properties at June
30, 1997 will be substantially evaluated and therefore subject to
amortization in
F-7
<PAGE> 38
12 to 24 months. The Company capitalized interest in the amount of
$317,370 and $58,831 for fiscal years 1997 and 1996, respectively,
relating to unevaluated properties.
Goodwill
The excess of the purchase price over the estimated fair value of net
assets acquired is included in goodwill and is amortized on a
straight-line basis over fifteen years. At each balance sheet date,
management assesses whether there has been a permanent impairment in
the value of goodwill by comparing anticipated undiscounted future cash
flows from operating activities with the carrying value of the
goodwill. Other factors considered by management in this assessment
include operating results, trends and prospects, as well as the effects
of obsolescence, demand, competition, and other economic factors.
All goodwill is related to the Company's data processing operation.
Deferred Financing Costs
Costs incurred in connection with the issuance of the Company's
long-term debt and notes payable are capitalized and amortized over the
terms of the respective borrowings using a method which approximates
the interest method. Accumulated amortization relating to deferred
financing costs totaled $125,480 and $67,313 at June 30, 1997 and 1996,
respectively.
Income Taxes
The Company follows the asset and liability method in accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recorded for the estimated future tax consequences attributable to
the difference between the financial carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using the tax rate in effect for
the year in which those temporary differences are expected to turn
around. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the year of the enacted rate change.
Earnings Per Share
Primary earnings per share are based upon the weighted average number
of outstanding shares of common stock during the respective years.
Fully diluted earnings per share is not presented because such amounts
would be antidilutive.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. This Statement specifies the computation,
presentation and disclosure requirements for earnings per share. This
statement is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The Company does not
expect the adoption of SFAS 128 to have a significant impact on its
calculation of earnings per share.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reported
F-8
<PAGE> 39
period. The Company's most significant estimates are based on
uncompleted seismic acquisition contracts and remaining proved oil and
gas reserves. See Supplemental Oil and Gas Disclosures in Note 13.
While it is believed that such estimates are reasonable, actual results
could differ from those estimates due to uncertainties inherent in the
estimation process.
Stock Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation which is effective for the Company beginning
July 1, 1996. SFAS No. 123 permits, but does not require, a
fair-value-based method of accounting for employee stock option plans
which results in compensation expense being recognized in the results
of operations when stock options are granted. The Company plans to
continue to use the current intrinsic value method of accounting for
such plans where no compensation expense is recognized. See Note 8 for
the pro forma disclosure of net income and earnings per share as if the
fair value method of accounting had been applied.
Concentration of Credit Risk
The Company maintains deposits in a bank which may exceed the amount of
federal deposit insurance available. Management periodically assesses
the financial condition of the institution and believes that any
possible deposit loss is minimal. The Company has not experienced such
losses in the past.
The Company operates primarily in the southern United States and grants
credit to substantially all of its customers, which are primarily
independent oil and gas exploration, production and service companies.
The Company performs on-going credit evaluations of its customers and
generally does not require collateral for accounts receivable. The
Company recorded allowances for doubtful accounts totaling $721,697 and
$125,172 at June 30, 1997 and 1996, respectively. The increase at June
30, 1997 was primarily the result of unresolved billings with two
customers.
Four customers accounted for approximately 68% of gross accounts
receivable at June 30, 1997 compared to the three largest accounting
for 49% at June 30, 1996. No other customer accounted for more than 10%
of receivables at either date.
Major Customers
The Company's mix of customers changes yearly as contracts are awarded
and completed. The Company is unable to anticipate whether significant
portions of its future revenues may be attributable to a few customers,
although it is likely the customer mix will change from year to year.
In fiscal 1997, one customer accounted for 29% of the Company's
revenues while another accounted for 13%. In fiscal 1996, the Company
had 9% of its revenue from one customer with less than 1% of fiscal
1997 revenues.
3. RESTATEMENT AND RECLASSIFICATIONS:
The Company has restated and reclassified its financial statements for
the years ended June 30, 1997 and 1996. Except as otherwise stated
herein, all information presented in the Consolidated Financial
Statements and related Notes include all such restatements and
reclassifications.
In February 1998, the Company's independent accountants (Coopers &
Lybrand L.L.P.) who had issued opinions on the financial statements for
the years ended June 30, 1997 and 1996, resigned
F-9
<PAGE> 40
and stated that its opinions with respect to the financial statements
for those years should no longer be relied upon. In March 1998, the
Company engaged Arthur Andersen LLP as its independent public
accountants to perform the necessary audits to issue new auditors'
reports on the financial statements for fiscal 1997 and 1996.
As a result of a comprehensive review begun by the Company in December
1997, and the audits performed by new independent public accountants,
it was determined that certain adjustments and reclassifications were
necessary to fairly state the financial statements for the years ended
June 30, 1997 and 1996. These adjustments principally relate to the
timing for recognition of contract revenue and associated costs under
percentage of completion accounting and to certain costs which were
expensed as cost of data acquisition but should have been recorded as
capitalized oil and gas properties. In addition, it was determined that
the gain on the sale of oil and gas properties previously reported of
$559,461 in fiscal 1997, should not have been recognized in income but
instead recorded as a reduction of oil and gas properties in accordance
with full cost accounting. The following is a summary of the
adjustments and the related impact on the statement of operations for
each year previously reported:
<TABLE>
<CAPTION>
RESTATEMENTS FOR THE YEAR ENDED
JUNE 30,
-------------------------------
Increase (decrease) of amounts previously reported
1997 1996
----------- -----------
<S> <C> <C>
Data acquisition revenues $ 1,428,718 $(1,721,650)
Data processing and reproduction revenues 79,100 (79,100)
Cost of data acquisition (373,149) 1,074,658
Gain on sale of oil and gas property (559,461) --
Interest expense 72,168 50,515
----------- -----------
Net adjustments 647,376 (675,577)
Net loss previously reported (6,171,539) (808,857)
----------- -----------
Restated net loss for periods $(5,524,163) $(1,484,434)
=========== ===========
</TABLE>
The net financial impact of these adjustments increases the loss
previously reported in fiscal 1996 by $675,577 to $1,484,434 and
reduces the loss previously reported in fiscal 1997 by $647,376 to
$5,524,163 resulting in a net charge to equity of $28,201 for the
combined two-year period.
F-10
<PAGE> 41
4. SEISMIC PROPERTY AND EQUIPMENT:
The following is a summary of seismic property and equipment:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Recording instruments and field equipment $ 22,992,987 $ 22,318,510
Furniture and fixtures 728,973 450,929
Vehicles 1,508,895 1,493,171
Software 441,174 419,429
Leasehold improvements 26,939 26,939
------------ ------------
25,698,968 24,708,978
Less: accumulated depreciation and
amortization (9,802,433) (6,755,300)
------------ ------------
$ 15,896,535 $ 17,953,678
============ ============
</TABLE>
5. UNCOMPLETED SEISMIC ACQUISITION CONTRACTS:
Costs, estimated earnings and billings on uncompleted seismic
acquisition contracts consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Costs incurred $ 6,784,315 $ 8,114,220
Estimated earnings 140,530 822,041
Billings to date (6,722,695) (7,926,071)
----------- -----------
$ 202,150 $ 1,010,190
=========== ===========
Included in the accompanying balance sheet
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 702,066 $ 3,278,086
Billings in excess of costs and estimated
earnings on uncompleted contracts (499,916) (2,267,896)
----------- -----------
$ 202,150 $ 1,010,190
=========== ===========
</TABLE>
F-11
<PAGE> 42
6. DEBT AND OBLIGATIONS:
The following is a summary of debt and obligations:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable to RIMCO, with 10% interest only paid monthly until July
1, 1998, then monthly installments of $138,106, including interest
with balance due December 1, 1999; collateralized by seismic
equipment, net of $50,918 unamortized discount $ 6,449,083 $ 6,435,000
Revolving line of credit of $5,500,000 with RIMCO
with 12% interest paid monthly and principal due
December 1, 1999; collateralized by oil and gas properties 5,350,000 --
Note payable to RIMCO, with monthly installments of $72,917, plus
interest at 10% through February 2000; collateralized by seismic
equipment, net of $22,604 unamortized discount 2,309,911 3,173,333
Note payable to RIMCO, 12% interest paid monthly
and balance due December 1, 1999; collateralized by
seismic equipment 2,000,000 --
Revolving line of credit of $5,000,000 with a financial institution
with interest due monthly at a base rate plus .5% (9% at June 30,
1997); collateralized by accounts receivable; maturing August 31, 1998 635,525 3,571,010
Obligation of operating lease for equipment not
expected to be utilized in the future 929,191 --
Exchangeable notes payable to RIMCO with interest paid
monthly at 10% and principal due February 1, 2002;
converted to shares of the Company's common stock on
September 30, 1996 -- 1,151,600
Convertible notes payable to RIMCO with interest paid monthly at 5% and
principal due February 1, 1998; converted to shares of the Company's
common stock on August 14, 1996 -- 500,000
Notes payable to finance insurance policies with varying
monthly installments and interest rates, mature within one year 426,968 418,297
Other notes payable 52,321 95,319
------------ ------------
18,152,999 15,344,559
Less: current maturities (1,423,859) (4,960,447)
------------ ------------
$ 16,729,140 $ 10,384,112
============ ============
</TABLE>
Scheduled maturities of debt and obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998 $ 1,423,859
1999 2,492,202
2000 14,236,938
-----------
$18,152,999
===========
</TABLE>
F-12
<PAGE> 43
On January 19, 1996, the Company entered into a financing arrangement
with Resource Investors Management Company and four partnerships of
which it is the general partner (collectively "RIMCO") providing up to
$7,000,000, of which $4,000,000 was immediately funded to restructure
existing debt. The debt restructure consisted of (i) $3,500,000 in 10%
Senior Secured General Obligation Notes payable in 48 equal monthly
installments of principal plus interest, and (ii) $500,000 in 5%
Convertible Notes maturing on February 1, 1998, with monthly payments
of interest, convertible into common stock of the Company (the
"Convertible Notes") at a conversion price of $3.45 per share, subject
to adjustment. The remaining $3,000,000 was subsequently funded under
10% Senior Secured Exchangeable General Obligation Notes, which were
exchangeable for common stock of the Company (the "Exchangeable Notes")
at an exchange price of $3.77 per share, subject to adjustment. The
proceeds were used to finance the Company's exploration and production
activities. In connection with this financing arrangement, the Company
issued to RIMCO warrants to purchase 165,000 shares of the Company's
common stock at a purchase price of $3.14 per share, subject to
adjustment. The Company valued these detachable warrants at $100,000
which is reflected as an addition to additional paid in capital. On
August 14, 1996, the Company exercised its right to convert the
Convertible Notes into 145,208 shares of the common stock of the
Company. On September 30, 1996, the Company exercised its right to
exchange the Exchangeable Notes for 795,754 shares of the Company's
common stock.
On May 28, 1996, the Company entered into an additional credit facility
with RIMCO pursuant to which the Company issued 10% Senior Secured
General Obligation Notes in the aggregate principal amount $6,500,000.
The proceeds were used to acquire new seismic equipment and retire some
existing debt. The notes, which are secured by the Company's seismic
equipment, provide for monthly payments of interest only until November
1, 1996 (extended to July 1, 1998), then $138,106, including interest,
with the balance due December 1, 1999. In connection with this credit
facility, the Company issued to RIMCO warrants to purchase 278,650
shares of the Company's common stock at a purchase price of $5.00 per
share, subject to adjustment.
On December 20, 1996, the Company entered into another financing
agreement with RIMCO to provide $4,000,000 (increased to $5,500,000 on
March 27, 1997) under a revolving credit facility for the expansion of
the Company's exploration and production activities ($5,350,000
outstanding at June 30, 1997). RIMCO has the right of approval on any
property that funds are advanced toward. The financing agreement is
secured by the Company's oil and gas properties.
On March 27, 1997, the Company borrowed an additional $2,000,000 from
RIMCO under new 12% Senior Secured General Obligation Notes with
interest payable monthly (interest due after June 30, 1997, has been
extended to July 1, 1998) and principal due December 1, 1999. The
proceeds were used for working capital. The notes are secured by the
Company's seismic equipment.
On August 6, 1997, the Company borrowed an additional $2,000,000 from
RIMCO under another 12% Senior Secured General Obligation Note, also
secured by the Company's seismic equipment, with interest payable
monthly (extended to July 1, 1998) and principal due December 1, 1999.
The proceeds were used to fund the shareholder settlement described in
Note 11.
On November 3, 1997, the Company entered into two additional financing
agreements with RIMCO for $2,144,000 and $1,730,383, under revolving
credit facilities and issued 12% Senior Secured General Obligation
Notes with interest payable monthly and principal due December 1, 1999.
All of the proceeds from the $2,144,000 facility were used for working
capital and the notes are secured by the Company's seismic equipment.
All of the proceeds from the $1,730,383
F-13
<PAGE> 44
facility were used to expand the Company's oil and gas exploration
activities and the notes are secured by oil and gas properties.
These loan agreements obtained from RIMCO described above have numerous
covenants, the most restrictive of which require the Company to
maintain earnings before depreciation, amortization and interest of
greater than $2,000,000 through August 31, 1996, and greater than
$2,500,000 thereafter. The Company must also maintain a current ratio,
as defined by the note agreements, greater than 0.75 to 1.0 through
September 30, 1996, and greater than 1.0 thereafter. In addition, the
Company must maintain a tangible net worth, as defined by the note
agreements, of greater than $6,000,000 through September 30, 1996, and
$7,000,000 thereafter. As of June 30, 1997, the Company was not in
compliance with several of the covenants. See Note 1 for further
discussion.
The Company has a $5,000,000 revolving line of credit with a financial
institution for the financing of its trade receivables. This agreement
provides that the Company must maintain a minimum net worth of
$3,000,000 and annual earnings before interest, taxes, depreciation and
amortization of at least $500,000, plus certain other covenants. The
Company was not in compliance with certain provisions of the agreement
but received advances until November 30, 1997, at which time, at the
Company's request, the agreement was terminated.
The Company leases a 720 channel OPSEIS 5586 telemetry acquisition
system under an operating lease through March 2000. Due to the
recording limitations of this system, the Company believes it has
become non-competitive in the 3-D data acquisition market. The system
has not operated since October 1996 and the Company recognized the
remaining $929,191 of lease payments in the fourth quarter of fiscal
1997. The current portion of this obligation is included in current
portion of long-term obligations.
The weighted average interest rate on short-term borrowings at June 30,
1997, was approximately 8.29%.
7. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases certain seismic equipment, vehicles and office
facilities under operating leases. The future minimum lease payments
under the Company's noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1998 $901,268
1999 195,213
2000 195,213
2001 195,213
2002 195,213
Thereafter 553,105
</TABLE>
Total rental expense under the Company's various operating leases for
the years ended June 30, 1997 and 1996 were $2,493,053 and $1,800,371,
respectively.
F-14
<PAGE> 45
Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position. The resolution
in any reporting period of one or more of these matters in a manner
adverse to the Company could have a material impact on the Company's
results of operations and cash flows for that period.
The Company has employment contracts with certain of its officers and
key employees for periods up to two years that generally provide for
automatic renewals unless notice is given within a specified period.
Some of the contracts provide for a one year period of continued
employment with no reduction in compensation or benefits in the event
of a merger, sale of substantially all of the assets or a change in
control.
As of January 1, 1996, the Company adopted a 401(k) qualified
retirement plan. The Company makes matching contributions in an amount
equal to 50% of an employee's contribution up to 6%. The Company's
expense was $55,600 in fiscal 1997 and $15,883 in fiscal 1996.
See Note 11 regarding a shareholder suit brought during fiscal 1997 and
settled subsequent to June 30, 1997.
8. STOCKHOLDERS' EQUITY:
Stock Option Plans
The Company has three stock option plans, two for employees and one for
non-employee Directors (the "Plans") under which an aggregate of
555,000 shares of common stock are reserved for issuance pursuant to
the Plans. The Plans are administered by the Board of Directors or a
committee appointed by the Board of Directors (the "Plan
Administrator"). The Plan Administrator determines, subject to the
provisions of the Plan, the employees to whom options are granted and
the number of options to be granted. The Plan Administrator may grant
(i) "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986 and (ii) "non-qualified stock options"
(options which do not meet the requirements of Section 422).
Incentive stock options and non-qualified options granted under the
Plans must have an exercise price equal to at least the fair market
value of the common stock at the date the option is granted. Each
option granted under the Plans may have a term of up to ten years,
except that incentive stock options granted to a stockholder who, at
the time of the grant, owns more than 10% of the voting stock of the
Company, may have a term of up to only five years. The exercise price
of options granted to stockholders possessing more than 10% of the
total combined voting power of all classes of stock of the Company must
not be less than 110% of the fair market value of such stock on the
date of grant and options granted under the non-employee plan provides
that the price of grants be 125% of the fair market value on the date
of grant. Options granted under the plans have generally been fully
exercisable after the grant.
F-15
<PAGE> 46
The following table summarizes stock option activity of the Plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Options Outstanding
Beginning of Period 357,000 $ 4.12 258,500 $ 3.77
Granted -- -- 375,000 4.09
Exercised (15,000) 3.42 (80,000) 3.66
Forfeited (94,500) 3.77 (196,500) $ 3.80
-------- ----------- -------- -----------
End of Period 247,500 $ 4.29 357,000 $ 4.12
======== ========
Shares reserved for
grant at end of period 307,500 213,000
======== ========
</TABLE>
As of June 30, 1997, all options were exercisable at a weighted average
exercise price of $4.29. The weighted average remaining contractual
life of options outstanding at June 30, 1997 is 8.4 years.
Warrants
As of June 30, 1997, there were 783,650 common stock warrants
outstanding, all of which are exercisable at June 30, 1997, at prices
ranging from $2.50 to $5.00. Of this, 120,000 warrants are held by
directors.
The Company applies the intrinsic value method for reporting
compensation expense pursuant to Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees to its stock-based
compensation plans. Accordingly, no compensation expense has been
recognized for awards granted under these plans. Had compensation
expense for the Company's stock-based compensation plans been
determined in accordance with the fair value method pursuant to SFAS
No. 123, the Company's pro forma net loss and net loss per share for
the years ended June 30, 1997 and 1996, would have been as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net loss (in thousands) $ (5,524) $ (1,490)
Net loss per share $ (1.10) $ (0.35)
</TABLE>
The fair value of the options and warrants granted during fiscal 1996
(none granted in fiscal 1997) is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-
average assumptions: a) no dividends paid, b) expected volatility of
ranges from 54.72% to 56.68%, c) risk-free interest rate ranges from
5.31% to 6.74% and d) expected life is 10 years for options and 5 years
for warrants.
F-16
<PAGE> 47
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts. SFAS No. 123 does not apply to awards
prior to fiscal 1996.
9. INCOME TAXES:
Deferred tax assets (liabilities) as of June 30, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 4,809,000 $ 2,581,000
Property and equipment (3,945,000) (1,128,000)
Shareholder litigation payable 410,000 --
Obsolete equipment payable 316,000 --
Other, net 272,000 97,000
----------- -----------
1,862,000 1,550,000
Less valuation allowances (1,862,000) (1,550,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
The Company has tax net operating loss carryforwards of approximately
$14,145,000 available to offset future federal taxable income which
will expire if not used in fiscal years 2007 through 2012.
Under federal tax law, the amount of availability of loss carryforwards
(and certain other tax attributes) are subject to a variety of
interpretations and restrictive tests applicable to the Company and its
subsidiaries. The utilization of such carryforwards could be limited or
effectively lost upon certain changes in ownership. Accordingly, while
the Company believes substantial loss carryforwards are available to
it, no assurance can be given concerning such loss carryforwards or
whether such loss carryforwards will be available in the future.
The Company has provided for a full valuation allowance as it is
uncertain as to whether the Company will be able to utilize all of its
net operating loss carryforwards. The Company has not provided for
federal income taxes for 1997 and 1996 due to the lack of taxable
income in the carryback period and the fully reserved net deferred tax
assets related to the net operating loss carryforwards and other items.
10. RELATED PARTY TRANSACTIONS:
The Company has a consulting agreement with its founder, which requires
payments to such individual of $4,000 per month and provides group
insurance for he and his wife through February 1, 2006. In connection
with the consulting agreement, the Company issued the founder warrants
to purchase 37,500 shares of the Company's common stock at $3.75 per
share. The Company also had an agreement with its former chairman of
the board, which required payments to such individual of $10,000 per
month, which terminated in fiscal 1997.
The Company has entered into various contracts to perform seismic
services for a company whose president and owner is a former director
of the Company. Approximately $1,201,000 in seismic services were
provided to this company during fiscal 1996. In March 1997, the Company
entered into a one year agreement with the employer of a director to
provide investor relations
F-17
<PAGE> 48
and corporate communication services for a monthly fee of $9,500. In
addition, another employer of this same director was paid a finders fee
of $79,500 for locating a credit facility.
The Company has several transactions with RIMCO as set forth in the
following paragraphs.
Two of the Company's directors are employees of RIMCO, in accordance
with terms of the financing agreements with RIMCO they have the right
to designate two directors.
As of June 30, 1997, the Company owed RIMCO an aggregate of $16,182,516
under various financing arrangements as described in Note 6, plus
$24,518 of accrued interest. Subsequent to June 30, 1997, RIMCO loaned
the Company an additional $2,000,000 in connection with the settlement
of a shareholder lawsuit described in Note 11. In addition, on November
3, 1997, the Company entered into two additional financing agreements
with RIMCO for $2,144,000 and $1,730,383 under revolving credit
facilities and issued 12% Senior Secured General Obligation Notes with
interest payable monthly and principal due December 1, 1999. All of the
proceeds from the $2,144,383 facility were used for working capital and
the notes are secured by the Company's seismic equipment. All of the
proceeds from the $1,730,000 facility were used to expand the Company's
oil and gas exploration activities and the notes are secured by oil and
gas properties.
The Company and affiliates of RIMCO participate in three oil and gas
prospects on similar terms. RIMCO may approve all oil and gas prospects
to which the Company commits under terms of certain of the financing
arrangements. In addition, the Company owes RIMCO approximately $17,000
for miscellaneous travel expenses.
According to information furnished to the Company by RIMCO, RIMCO owned
940,962 shares of the Company's common stock at June 30, 1997 (18% of
the shares outstanding). In the settlement of the shareholder lawsuit
described in Note 11, RIMCO has the obligation to acquire, under
certain conditions, 205,300 additional shares. RIMCO also holds
warrants to purchase 443,650 additional shares (see Note 6). If the
shares were acquired and the warrants were exercised, RIMCO could
increase its holding to 27% of the shares outstanding.
11. SHAREHOLDER LITIGATION AND SUBSEQUENT EVENT:
The Company was involved in an aborted merger earlier in fiscal 1997
that led to a proxy fight with a group of shareholders that styled
themselves "The Universal Seismic Stockholders' Protective Committee"
(the "Stockholders' Committee"). The proxy fight was resolved at the
reconvened Annual Meeting of Shareholders on February 11, 1997, at
which management's slate of directors was reelected and all of the
Stockholders' Committee's proposals were defeated.
Thereafter, Michael T. Kanarellis, one of the members of the
Stockholders' Committee, submitted letters to various members of the
Audit Committee of the Company, alleging that "the Company's financial
statements for the fiscal year ended June 30, 1996 and the fiscal
quarters ended September 30, 1996 and December 31, 1996 were false and
materially misstated" and alleging certain specific items of
misstatement. The Stockholders' Committee also filed a suit against the
Company and its directors styled The Universal Seismic Associates, Inc.
Stockholders' Protective Committee, Michael T. Kanarellis, and Robert
J. Kecseg Vs. Michael J. Pawelek, Ronald L. England, Calvin G. Cobb,
Gary Milavec, Steven Oakes, Rick Trapp, RIMCO Associates, L.P.,
Resource Investors Management Company, L.P. and Universal Seismic
Associates, Inc., in the United States District Court in Delaware.
F-18
<PAGE> 49
All parties entered into a Stipulation of Settlement which was tendered
to the Court on August 7, 1997, whereby RIMCO agreed to purchase all of
the shares of the Company common stock owned by the Stockholders'
Committee for an aggregate purchase price of $650,000, or $3.17 per
share. Also in connection with the settlement, RIMCO entered into a $2
million loan agreement with the Company, with the proceeds being used
to fund the immediate costs of settlement and to pay other expenses
associated with the lawsuit. The settlement was approved by the Court
on October 1, 1997, at which time the Court entered judgment dismissing
all claims with prejudice. The Company believes that it will recover a
substantial portion of its costs of settlement and expenses associated
with the lawsuit from its directors' and officers' liability insurance
carrier. However, there can be no assurance that the Company will
recover a substantial portion.
12. SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED):
The supplementary information regarding the Company's oil and gas
activities is presented in accordance with the requirements of the
Securities and Exchange Commission ("SEC") and SFAS No. 69, Disclosures
about Oil and Gas Producing Activities..
Reserve quantities and future production are based primarily upon the
reserve report of the independent oil and gas engineering firm of
Netherland, Sewell & Associates, Inc. based on data supplied to them by
the Company.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions
at the end of the respective years. Proved developed oil and gas
reserves are those reserves expected to be recovered through existing
equipment and operating methods. All reserves are located in the United
States.
Proved Oil and Gas Reserves
The following presents the Company's estimated oil and gas proved
reserves:
<TABLE>
<CAPTION>
Oil and Natural
Condensate Gas
Bbls Mcf
---------- ----------
<S> <C> <C>
June 30, 1996 -- --
Extensions, discoveries and other additions 184,433 9,606,184
Production (418) (48,331)
---------- ----------
June 30, 1997 184,015 9,557,853
========== ==========
Proved developed reserves, June 30, 1997 14,910 797,317
========== ==========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
The calculation of estimated future net cash flows in the following
table assumed the continuation of existing economic conditions and
applied year-end prices (except for future price changes as allowed by
contract) of gas and condensate to the expected future production of
such reserves, less estimated future expenditures (based on current
costs) to be incurred in developing and producing those proved
reserves.
F-19
<PAGE> 50
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair market value
of a company's gas and oil reserves. These estimates reflect proved
reserves only and ignore, among other things, changes in prices and
costs, revenues that could result from probable reserves which could
become proved reserves in fiscal 1998 or later years, and the risks
inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves is shown below (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Future cash inflows $ 24,816
Less:
Future production costs (3,993)
Future development costs (4,348)
--------
Future net cash flows before income taxes 16,475
10% annual discount of future net cash
flows before income taxes (8,473)
--------
Discounted future net cash flows
before income taxes 8,002
Discounted future income tax expense 708
--------
Standardized measure of discounted future
net cash flows $ 7,294
========
</TABLE>
The realization of the discounted cash flows associated with the
Company's proved reserves are dependent on, among other things, the
availability of financing to complete development activities.
The following are the principal sources of change in standardized
measure of discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Sales of oil and gas produced, net of production costs $ (89)
Extensions, discoveries and additions, net of costs 8,091
Net change in income taxes (708)
-------
Net increase $ 7,294
-------
</TABLE>
Year-end wellhead prices received by the Company from the sale of oil
and natural gas were $17.48 per Bbl and $2.15 per Mcf, respectively.
F-20
<PAGE> 51
Capitalized Costs
The following table (in thousands) sets forth the capitalized costs
relating to oil and gas activities and related depreciation, depletion
and amortization. The Company began its oil and gas activities in
fiscal 1996.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Proved properties $ 3,077 $ --
Unproved properties 3,839 2,167
------- -------
6,916 2,167
Depreciation, depletion and amortization (35) --
------- -------
$ 6,881 $ 2,167
======= =======
</TABLE>
Capitalized Costs Not Being Amortized
The following table sets for the summary of oil and gas property costs
not being amortized as of June 30, 1997, by the year in which such
costs were incurred (in thousands):
<TABLE>
<CAPTION>
TOTAL 1997 1996
------ ------ ------
<S> <C> <C> <C>
Exploration and development costs $3,839 $2,727 $1,112
====== ====== ======
</TABLE>
Capitalized Costs Incurred
The following table sets forth the capitalized costs incurred in oil
and gas producing activities (in thousands):
<TABLE>
<CAPTION>
TOTAL 1997 1996
------- ------- -------
<S> <C> <C> <C>
Exploration costs $ 6,617 $ 4,450 $ 2,167
Development costs 980 980 --
Sale of unproved property (681) (681) --
------- ------- -------
$ 6,916 $ 4,749 $ 2,167
======= ======= =======
</TABLE>
F-21
<PAGE> 52
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Summarized quarterly financial information is presented as follows (all
information reflects restatements and reclassifications as discussed in Note 3
(in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
SEPTEMBER DECEMBER MARCH JUNE
30 31 31 30 TOTAL
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Operating revenues $ 8,952 $ 10,535 $ 6,405 $ 6,903 $ 32,795
Operating expenses 9,592 9,249 7,462 10,731 37,034
-------- -------- -------- -------- --------
Operating income (loss) (640) 1,286 (1,057) (3,828) (4,239)
Interest expense and other
Income, net (346) (311) (292) (336) (1,285)
-------- -------- -------- -------- --------
Net income (loss) $ (986) $ 975 $ (1,349) $ (4,164) $ (5,524)
======== ======== ======== ======== ========
Net earnings (loss) per share $ (.23) $ .19 $ (.26) $ (.80) $ (1.10)
======== ======== ======== ======== ========
Weighted average shares
Outstanding 4,365 5,229 5,230 5,234 5,013
======== ======== ======== ======== ========
YEAR ENDED JUNE 30, 1996
Operating revenues $ 4,343 $ 3,182 $ 7,055 $ 9,218 $ 23,798
Operating expenses 4,606 4,460 6,377 8,785 24,228
-------- -------- -------- -------- --------
Operating income (loss) (263) (1,278) 678 433 (430)
Interest expense and other
Income, net (303) (225) (262) (264) (1,054)
-------- -------- -------- -------- --------
Net income (loss) $ (566) $ (1,503) $ 416 $ 169 $ (1,484)
======== ======== ======== ======== ========
Net earnings (loss) per share $ (.13) $ (.36) $ .10 $ .04 $ (.35)
======== ======== ======== ======== ========
Weighted average shares
Outstanding 4,202 4,202 4,204 4,242 4,213
======== ======== ======== ======== ========
</TABLE>
F-22
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description File No.
------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company 33-46235
3.2 Amended and Restated Bylaws of the Company 33-57994
4.1 Form of Stock Certificate 33-46235
10.2 Employment Agreement between the Company and Michael
J. Pawelek effective March 1, 1995 33-46235
10.3 Form of Indemnification Agreement between the Company
and directors and certain officers 33-46235
10.4 Stock Incentive Plan 33-46235
10.5 1994 Employee Stock Option Plan (Ex. 4.2) 33-79448
10.6 1995 Non-Employee Directors' Stock Option Plan 96-10KSB
10.13 Office space lease between Park Ten No. 1, Ltd. and
Universal Seismic Associates, Inc. 96-10KSB
10.14 Loan and Security Agreement between Fidelity Funding, Inc.
and the Company 96-10KSB
10.15 Note Purchase Agreement dated as of January 19, 1996 by
and between the Company, RIMCO Partners, L.P., RIMCO Partners,
L.P.II, RIMCO Partners, L.P.III and RIMCO Partners, L.P.IV,
("RIMCO")(RIMCO #1) 96-10KSB
10.15 First Amendment to RIMCO #1 Note Purchase Agreement dated as of May
28, 1996 by and between the Company and RIMCO 97-10KSB/A
10.15 Second Amendment to RIMCO #1 Note Purchase Agreement
dated as of August 13, 1996 97-10KSB/A
10.15 Third Amendment to RIMCO #1 Note Purchase Agreement 12/31/96 -
dated as of December 20, 1996 10QSB
10.15 Fourth Amendment to RIMCO #1 Note Purchase Agreement 03/31/97 -
dated as of March 27, 1997 (Ex.1.4) 10QSB
10.15 Fifth Amendment to RIMCO #1 Note Purchase Agreement
dated as of August 6, 1997 97-10KSB/A
10.16 Note Purchase Agreement dated as of January 19, 1996 by and
between UNEXCO and RIMCO Partners, L.P.II, RIMCO
Partners L.P.III. and RIMCO Partners, L.P.IV 96-10KSB
10.16.1 First Amendment to Note Purchase Agreement dated as of May
28, 1996 by and between UNEXCO and RIMCO Partners,
L.P. II, RIMCO Partners L.P.III, RIMCO Partners L.P.IV 96-10KSB/A
10.17 Stock Ownership and Registration Rights Agreement by and
between the Company, UNEXCO and RIMCO 96-10KSB
</TABLE>
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description File No.
------- ----------- --------
<S> <C> <C>
10.17.1 First Amendment to Stock Ownership and Registration Rights
Agreement, dated as of May 28, 1996 96-10KSB/A
10.18 Warrant Agreement dated January 19, 1996 by and between the
Company and RIMCO 96-10KSB
10.19 Guaranty and Exchange Agreement dated January 19, 1996 by
and between UNEXCO and RIMCO 96-10KSB/A
10.19.1 First Amendment to Guaranty and Exchange Agreement dated
May 28, 1996 by and between UNEXCO and RIMCO 96-10KSB
10.20 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO partners, L.P. for the
purchase of 57,750 shares of the Company's Common Stock 96-10KSB
10.21 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.II for the
purchase of 57,750 shares of the Company's Common Stock 96-10KSB
10.22 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.III for the
purchase of 6,600 shares of the Company's Common Stock 96-10KSB
10.23 Common Stock Purchase Warrant executed January 19, 1996
by the Company in favor of RIMCO Partners, L.P.IV for the
purchase of 42,900 shares of the Company's Common Stock 96-10KSB
10.24 Note Purchase Agreement dated as of May 28, 1996 by and
between the Company and RIMCO (RIMCO #2) 96-10KSB
10.24.1 First Amendment to RIMCO #2 Note Purchase Agreement 12/31/96 -
dated as of December 20, 1996 10QSB
10.24.2 Second Amendment to RIMCO #2 Note Purchase Agreement 03/31/97 -
dated as of March 27, 1997 (Ex.1.5) 10QSB
10.24 Third Amendment to RIMCO #2 Note Purchase Agreement
dated as of August 6, 1997 97-10KSB
10.25 Warrant Agreement dated May 28, 1996 by and between the
Company and RIMCO 96-10KSB
10.26 Common Stock Purchase Warrant executed May 28, 1996 by
the Company in favor of RIMCO Partners, L.P. for the
purchase of 175,550 shares of the Company's Common Stock 96-10KSB
10.27 Common Stock Purchase Warrant executed May 28, 1996 by the
Company in favor of RIMCO Partners, L.P.II for the
purchase of 31,766 shares of the Company's Common Stock 96-10KSB
10.28 Common Stock Purchase Warrant executed May 28, 1996 by the
Company in favor of RIMCO Partners, L.P.III for the
purchase of 71,334 shares of the Company's Common Stock 96-10KSB
10.29 Amended and Restated Note Purchase Agreement dated March 03/31/97 -
27, 1997 between UNEXCO and RIMCO (Ex.1.1) 10QSB
10.30 Amended and Restated Note Purchase Agreement dated March 03/31/97 -
27, 1997 between UNEXCO and RIMCO (Ex.1.2) 10QSB
</TABLE>
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description File No.
------- ----------- --------
<S> <C> <C>
10.31 Amended and Restated Pledge Agreement dated March 27, 03/31/97 -
1997 between the Company and RIMCO (Ex.1.3) 10QSB
10.32 Note Purchase Agreement dated as of March 27, 1997 between 03/31/97 -
the Company and RIMCO (Ex. 1.6) 10QSB
10.32.1 First Amendment to Note Purchase Agreement dated as of
August 6, 1997 97-10KSB
10.32.2 Note Purchase Agreement dated as of August 6, 1997 between
the Company and RIMCO 97-10KSB
10.33 Employment Agreement between the Company and Ronald L.
England effective March 1, 1995 97-10KSB
10.34 Employment Agreement between the Company and Peter B.
Spooner effective March 31, 1996 97-10KSB
10.35 Employment Agreement between the Company and Patrick
A. Donais effective August 1, 1997 97-10KSB
10.36 Employment Agreement between the Company and Joe T. Rye
dated August 7, 1997 97-10KSB
10.37 Warrant to Purchase Shares of Common Stock executed
January 12, 1996 in favor of Ronald L. England for purchase
of 5,000 shares of the Company's Common Stock 97-10KSB
10.38 Warrant to Purchase Shares of Common Stock executed
January 12, 1996 in favor of Ronald L. England for purchase
of 100,000 shares of the Company's Common Stock 97-10KSB
10.39 Warrant to Purchase Shares of Common Stock executed
January 16, 1996 in favor of Calvin G. Cobb for purchase of
15,000 shares of the Company's Common Stock 97-10KSB
10.40 Seismic equipment lease between NYNEX Credit Company
and the Company dated as of October 2, 1995 97-10KSB
10.41 Settlement Agreement and General Release dated effective
August 5, 1997 by and among The Universal Seismic
Associates, Inc. Stockholders' Protective Committee, Michael
T. Kanarellis, and Robert J. Kecseg, Michael J. Pawelek, Ronald
L. England, Calvin G. Cobb, Gary Milavec, Stephen Oakes,
Rick E. Trapp, Universal Seismic Associates, Inc., RIMCO
Associates, Inc. and Resource Investors Management Company
Limited Partnership. 97-10KSB
21.1 Subsidiaries of the Company 97-10KSB
23.2 Consent of Netherland, Sewell & Associates, Inc. 97-10KSB
27 Financial Data Schedule (included only in the electronic
filing of this document)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,859,677
<SECURITIES> 0
<RECEIVABLES> 6,301,573
<ALLOWANCES> (721,697)
<INVENTORY> 0
<CURRENT-ASSETS> 8,640,601
<PP&E> 32,615,669
<DEPRECIATION> (9,838,019)
<TOTAL-ASSETS> 32,248,033
<CURRENT-LIABILITIES> 10,267,586
<BONDS> 16,729,140
0
0
<COMMON> 523
<OTHER-SE> 5,250,784
<TOTAL-LIABILITY-AND-EQUITY> 32,248,033
<SALES> 32,795,147
<TOTAL-REVENUES> 32,795,147
<CGS> 0
<TOTAL-COSTS> 31,470,239
<OTHER-EXPENSES> 5,531,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,317,793
<INCOME-PRETAX> (5,524,163)
<INCOME-TAX> 0
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